A recently conducted survey by benefit manager Towers Watson shows that companies expect to give their employees an average 3% pay raise in 2016. The pay bump could be even bigger for top-performing employees, especially since labor markets have become increasingly competitive.
Business as usual
During the Great Recession, nearly a third of companies decided against pay raises, but years of recovery leading to 3.7% GDP growth in the second quarter have made pay raises critical to retaining top talent.
More than 98% of the 1,100 companies surveyed said they'll be boosting pay in 2016, up from 97% last year.
The levels of pay increases will probably vary depending on how highly managers rank employees' performance. Last year, workers receiving the highest marks were awarded an average 4.6% pay raise, while those with low marks saw their income climb by less than 1%.
Companies are poised to increase employee bonuses too. In 2014, 81% of employees received a bonus, but in 2015, the number climbed to 85%.
Employer willingness to share the wealth can be directly linked to falling unemployment, which is creating more opportunities for workers to switch employers, and growing pressure to shrink the pay gap between workers and executives.
In August, the unemployment rate fell to 5.1%, putting it at levels that the Federal Reserve has indicated it considers to be full employment. The current unemployment rate, which is down from a peak of 10% in 2009, has economists believing that the Federal Reserve will soon begin increasing interest rates in a bid to slow down economic growth to keep inflation in check.
If unemployment remains low, pressure to boost pay for workers could lead to a shrinking of the pay gap between a company's lowest and highest income earners. In August, average weekly earnings of all employees in the private sector totaled $868.11, a far cry south of the nine-figure salaries paid to many CEOs of publicly traded companies. In 2014, the average CEO of an S&P 500 company made 373 times more than the average production and non-supervisory worker.
Low unemployment could also lead companies to embrace more non-traditional ways to keep employees happy.
Sandra McLellan, North America practice leader of rewards, at Towers Watson, had this to say:
It's no longer all about base salary. While our research consistently shows the importance of pay when employees decide to stay or leave an organization, we also know their decisions are not just about the money. Opportunities for career development, learning development and challenging work are top drivers of retention. It's the value of the total package -- compensation, benefits, and nonmonetary rewards -- that makes the difference. As a result, companies are paying closer attention to understanding how employees value these elements.
Net worth is climbing
The pick-up in pay could help strengthen workers' personal balance sheets, which are already benefiting from a multi-year run in home prices and the stock market.
According to the Federal Reserve, American household collective net worth has grown to $84.9 trillion from less than $55 trillion in 2009. A lot of that increase is tied to median home prices, which have increased from $165,000 in Q1, 2009 to $234,000 in July and a 165% increase in the S&P 500 during roughly the same period of time.
Because homeowners and stock market investors have been the biggest beneficiaries of rising net worth, people wanting to make the most of their pay raise may want to consider putting all, or at least some, of it to work, rather than spending it. Banks are finally easing lending requirements for home purchases and retirement plans, such as 401(k) plans, provide investors with a simple way to sock more away in stocks for retirement.
The actual amount that companies pay out in the form of raises next year may differ from the survey, particularly if higher interest rates lead to slowing economic growth that dents corporate profit. Also, buying power associated with raises could slip if inflation, which is a relatively tame 1.7%, increases. Despite those risks, the biggest influence on pay next year is likely to remain the unemployment rate. If it stays at these levels or falls further, employers will be forced to up the ante to retain their best workers, and that's worth cheering about.