With equities markets amazingly breaching prior highs already and unemployment slowing dropping to 9% with projections of 8% by year-end, the data is indicating we are firmly in a recovery now. But it still just doesn’t “feel” like that. The mood is somber, employees are still feeling like they’re on the verge of a pink slip and people aren’t taking career risks – it’s play it safe. So, that begs the question as to whether employers need to give lavish raises this year in order to retain employees or not like when the economy was truly booming in the 1990s or early 2000s.
2011 Average Raise
I “heard” through the grapevine at my company that the average raise will be just 2% this year. I guess in the context of high unemployment and low CPI (regardless of whether the government’s numbers actually represent the inflation we actually see [food, healthcare costs, college costs, etc]). In the broader economy, the Conference Board’s projection for 2011 salaries is an increase of 3%, better than the 2.5% in 2010. This doesn’t quite jive with what I’m hearing within my company since our average raise was actually higher last year while the national average was lower. But I guess this has something to do with our individual company and industry as well, rather than the economy as a whole. Bear in mind, certain industries and companies are subject to different market forces. We heard a few months back about how Google had to enact 10% raises to retain employees and we’ll probably continue to see this type of behavior in hyper-growth industries related to the web and social networking. But the old economy careers? Probably closer to the national average or lower.
Why Are Raises Low Over the Past Few Years?
In talking to friends at other companies that were disappointed by their annual raise last year, they said in some cases, management gave out no raise whatsoever across the board. They had cited flat or low inflation year over year as a justifying factor. Other companies are citing shrinking profits or an uncertain financial climate moving forward.
They’re not giving out substantial raises because they don’t have to.
Why would they? Compensation is all about supply and demand and retaining your top talent. Even high performers with degrees in demand are staying put. Here’s why companies could probably be even more stingy and employees would still stay:
- The job market is stagnant. While I still see some decent volume and prospects through The Ladders notifications (which are great by the way – they focus solely on six-figure salaries and hone email updates to relevant location/titles/roles only), you just don’t see people jumping jobs like they used to. The openings aren’t there. Why?
- People are risk-averse right now, and rightly so. During the internet boom, anyone that could code was jumping from company to company annually chasing a sweeter deal. They had no qualms about going to a startup that may fail because they could just fall back on another hot job with a stronger company. There was simply more demand for those jobs than there were people to fill them. Now? Unemployment of very employable and qualified people is higher than this generation has ever seen. If you’ve got a job now, you want to keep it. Heck, I Passed on a 90% Pay Increase in this economy.
- Putting Off Retirement – People that weren’t laid off already are working longer. After taking a haircut in their retirement accounts, many people now intend on working years later than what they probably envisioned a few years ago. This is going to further suppress new job openings for years to come.
- Productivity is up. Companies really got lean during this prior recession and found ways to cut costs and jobs that will likely NEVER come back, no matter what kind of stimulus or intervention the government tries to throw at it.
- People can’t afford to relocate! Even high pay roles are now being offered with no relocation assistance or limited benefits. When you were sitting on a six-figure gain on your home value, it was really easy to jump up and move to another state (it was almost like an added signing bonus to tap that piggy bank every few years). Now, people are looking at taking a huge loss to move. This means companies don’t have to backfill jobs from departing employees.
All these factors have basically pushed the equation WAY in favor of corporations and away from the interests of employees seeking further wage increases. That being said, what I’m hearing most is “I don’t really care what raise they gave me this year, it’s not like I’d leave over it!”. So, in essence, I guess anyone that got a raise at all this year should be content.
What Are the Implications of Years of Low Salary Increases?
This is a rather grim self-fulfilling prophecy in that with lower annual raises, something’s gotta give. It seems as though, at least for the time being Americans have smartened up a bit under the New Normal. Savings rates are up and consumption is down. But that’s not good for job growth in industries that rely on consumption – travel, retail, just about every facet of our economy.
The silver lining is that with wage growth suppressed to this degree, even though there’s rampant money printing going on at the moment, it’s unlikely to result in hyperinflation as long as unemployment remains in the high single digits and salaries aren’t growing quickly. Frankly, Americans would rather have some inflation and a job, but we don’t have the luxury of choosing.
With these factors in mind, I could envision a scenario where annual raises continue to proceed at the 1-3% range for a couple years. What will be interesting to see as well is how union contracts are negotiated since they’re generally multi-year contracts and typically demand 3-5% annual raises regardless of economic conditions. Negotiations could become rather tough there as well for both private sector unions as well as public sector unions where states are facing major budget cutbacks as well. So, while I saw a rather low annual raise on the year, I wasn’t surprised nor am I angry over it given the environment. It beats a layoff!
Did Your Raise Suck?
What was your raise this year and did you think it was fair?
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