It’s that time of year again! Organizations are planning their salary increase budgets for the coming year. That process isn’t as simple as it looks, however. Effective organizations will explore four key areas to better understand the “best” approach when it comes to 2019 base pay compensation budgeting:
- The 2019 Economic Forecast and Its Impact on Employment and Wages
- The Employment Cost Index
- 2019 Minimum Wage Adjustments
- Salary Budget Survey Data
Let’s take a look at each of these four data sources and their impact on your organization.
The 2019 Economic Forecast and Its Impact on Employment and Wages
According to Forbes, in 2019:
- If productivity continues to increase at the recent pace, the US current labor force participation rate limits overall economic growth to 1.2%.
- To reach a 2.7% or higher growth forecast, the US needs to add another five million workers in the next two years. This is much higher than the number of available seniors who could fill jobs.
- Before putting more seniors to work, however, consider that the 55-years-and-up crowd is already working above historical norms. Retirement hasn’t happened yet for many of these individuals.
- Rising wages and the easy availability of jobs will draw more people into the labor force.
- Businesses unable to hire as many people as they would like will prioritize, giving up on low-productivity positions.
- Employers also will buy more equipment and software to substitute for people they cannot hire, boosting the average productivity of those who are still working.
The issue of the lower unemployment rate has certainly made itself known with many of our clients, especially those looking to hire technical and professional staff. This has resulted in creative ways to further develop internal staff, such as career pathing programs, as well as inflation in starting wages well above the general increase level. Astron suggests reviewing current job descriptions to be sure they accurately reflect how the job has evolved and re-set the pay appropriately.
The Employment Cost Index
According to the Bureau of Labor Statistics, as of June 2018, the current Employment Cost Index indicates that
- Compensation costs for private industry workers increased 2.9% over the year (2.4% increase in June 2017).
- Compensation costs increased 2.4% for management and professionals and 3.5% for sales and office occupations.
- Compensation costs increased 2.2% in education and healthcare related industries and 4.5% in information technology related industries.
Astron Solutions has observed the same wage inflation rate, especially the 3.5% inflation rate for technical and professional staff. Many of our clients are now creating a “mission critical job family” for positions where there is higher demand and that are critical to the services the organization provides. In many cases base pay adjustments can be as high as 4%. We suggest reviewing hard to fill positions and their impact on the success of the organization, and then isolating the roles into a separate pay family to better monitor and budget for the future.
2019 Minimum Wage Adjustments
Minimum wages continue to be adjusted upward in 2019. An excellent source for both state and municipality changes for 2019 can be found at SHRM. The following are key points to keep in mind when setting base pay adjustment budgets sensitive to minimum wage:
- In some areas, minimum wages will adjust annually based on a local cost of living index.
- In some areas, there has been a commitment made to raise the minimum wage to $15.00 over the next few years.
- In some cases, the move from 2018 to 2019 minimum wage will be dramatic and needs to be accounted for in the base pay adjustment budget. For example, consider the following:
- Massachusetts: $11.00 to $12.00, or a 9.1% increase
- Upstate New York: $10.40 to $11.10, or a 6.7% increase
- New York City Large Employers (11 or more employees): $13.00 to $15.00, or a 15.38% increase
- Often minimum wage adjustments are not surveyed. Thus, the information is not included in budget survey data for setting base pay adjustments. It is critical to keep this in mind. Check you state or local minimum wage change, and budget accordingly.
This has certainly been a major budgeting issue for many of Astron’s clients. A majority of clients in states with aggressive minimum wage moves have been forced to conduct extensive equity studies and studies of the employee relations and financial impacts these moves are creating. We suggest that when adjusting the minimum wage of the lowest pay grade be mindful of the potential impact that change will have on the entire pay system. In the short-term, consolidating lower pay grades and instituting a “Broad-Banded” pay grade design approach may help.
|2019 Base Pay Budget Projections|
|Willis Towers Watson||3.1%||3.2%||3.2%||3.1%||3.0%|
Overall base pay budgets, excluding minimum wage adjustments, are projected at 3.1%. This is up from last year’s projection of 2.9%.
As we move into 2019, we are finding more and more clients that are moving towards “decentralized” compensation systems to better gauge the impact of lower unemployment, minimum wage changes, and the need to control the overall compensation budget. We suggest considering compensation budgets of 3.5% to account for not only the normal base pay adjustments required, but also to fund career path development and minimum wage adjustments as necessary.
Stay tuned for our next issue of Astronology®, when National Director Mike Maciekowich shares his take on incentives and bonuses in 2019.
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