Reflecting uncertain economic conditions and a conservative cost-management environment, U.S. employers are projecting moderate pay raises for employees in 2012. Employers expect to fully fund their annual bonuses for workers this year, as corporate profits have increased, according to new survey data by global professional services company Towers Watson of 773 employers.

Companies are planning pay increases that will average 2.8% in 2012 for their salaried nonexecutive employees. This represents a moderate increase from the average 2.6% raise workers are receiving this year and 2.6% they received in 2010. Similar raises for 2012 are planned for executives and nonexempt employees. The survey, conducted in May and June of this year, was well before the stock market plunges of the last several weeks, and future volatility may impact how employers follow through on their responses.

“Because the numbers that companies are reporting in terms of actual increases this year are pretty conservative, it would take a lot more than just volatility in the stock market for companies to pull back,” says Laura Sejen, rewards global practice leader at Towers Watson. “The 2.6% already reflect some uncertainty in the market, so unless the economic indicators get worse, the numbers won’t change.”

According to the survey, workers who receive the highest performance ratings will be in store for median salary increases of 4.5% this year, which is 80% more than workers with average ratings will receive (2.5%). Workers with below-average performance ratings will receive median merit increases of 1.4%.

“Until the economy shows some solid and consistent improvement, most companies are keeping their salary budgets relatively tight,” Sejen says. “At the same time, companies also recognize the need to reward their top performers or risk losing them to competitors and, as a result, continue to differentiate pay raises based on individual performance.”

Sejen says that pre-recession numbers ran in the 3% to 3.5% range.

“One point may not sound like a lot, but the different between a 2.5% and a 3.5% increase can be the difference between having incremental increase in net post inflation versus barely keeping even with cost of living increases or even falling behind.”

Employers expect to fully fund annual bonuses

A separate TW survey of 316 North American companies found that companies’ average projected bonus funding for current-year performance is 101% of target, marking the second consecutive year that companies are able to fully fund their annual bonuses for workers. Companies funded annual bonuses in 2010 at 111% of target.

“Despite the recent economic turmoil, many companies are experiencing stronger profits and higher revenues this year. Since funding of annual bonus pools is typically based on these financial measures, companies are anticipating being well positioned to fund their annual bonus pools at target or better at year-end,” says Sejen.

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