Aug 20 2024
What to Expect in 2025: Pay Movement and Merit Budgets

Blue Whale Compensation has prepared the following comprehensive advisory report on current market and economic conditions to provide insights into how these factors may impact companies’ decisions regarding merit and pay increases in 2025.

U.S. WAGE INCREASES IN 2025

A) PROFESSIONAL AND MANAGERIAL JOBS

Pay increases in most white-collar roles are projected to moderate in 2025. This trend reflects the cautious economic outlook and general business sentiment. With economic growth expected to weaken moderately in the U.S. and Europe, some companies are adopting a conservative stance on salary increases. While pay freezes have become more common, especially in industries like tech where major players like Salesforce and Microsoft previously announced no raises, other sectors might follow this trend depending on economic conditions.

In line with this cautious approach, U.S. companies plan to raise salaries by an average of 3.9% next year, slightly lower than the 4.1% median increase observed this year, according to a survey by Willis Towers Watson (WTW). The decrease in planned salary increases corresponds with a reduction in employee turnover and resignations, which have been key drivers of higher pay in recent years. Additionally, the proportion of U.S. companies reporting challenges in attracting and retaining talent has dropped by 19 percentage points from 57% in 2023 to 38% this year. In response to the unusually tight labor market last year, employers had offered a median pay raise of 4.5% to stay competitive. This year’s more restrained increases reflect the stabilizing labor market and companies’ cautious approach in response to evolving economic conditions.

B) MANUFACTURING AND SERVICE JOBS

Contrasting with the slowdown in white-collar pay increases, blue-collar roles are likely to continue experiencing above-average wage growth in 2025. This is driven by factors such as rising minimum wages in various states and continued demand for skilled labor in sectors like construction, manufacturing, and transportation. The ongoing shortage of skilled workers means employers will need to offer competitive wages to attract and retain talent.

In California, for instance, as reported by CalChamber, the minimum wage is set to increase by 3.18% to $16.50 per hour on January 1, 2025, as a result of adjustments for inflation. Additionally, specific sectors, such as fast food and healthcare, will see even higher mandated minimum wages, with fast food employees earning at least $20 per hour starting in April 2024. These increases, alongside the potential for further hikes due to local ordinances and upcoming legislation, underscore the pressure on employers to offer competitive wages to attract and retain skilled labor in these industries. As such, blue-collar roles, particularly in high-demand sectors, are expected to see continued wage growth above the average in 2025.

C) OVERALL PROJECTION: WAGE AND SALARY MOVEMENT

Based on wage growth trends and economic conditions, Blue Whale Compensation expects wage/salary movement for 2025 to drop by 0.5% from 2024 levels. Projections include:

– 4.4% for production and blue-collar classifications

– 4.3% for hourly administrative positions

– 4.4% for professional administrative positions

– 4.3%  for managers and executives

D) PROJECTED MERIT INCREASES, BUDGETS: 2025

When setting budgets, it's crucial to differentiate between overall wage movements and planned increases. While overall wage movements encompass various pay-related decisions, including promotions, cost-of-living adjustments, and compliance with new minimum wage guidelines, planned increases specifically refer to the budgeted payroll percent increases that employers allocate for merit-driven or across-the-board pay adjustments.

Typically, budgeted payroll increases trail overall wage and salary movements by 0.5% to 0.75%. For 2025, projections suggest that merit increase budgets will range between 3.8% and 4.0%.

However, it's important to recognize that different data sources may present varying projections. For example, WorldatWork projects a 3.8% average salary budget increase for the U.S. in 2025, with a median of 4.0%. In contrast, Payscale presents a slightly lower projection, with an average planned increase of 3.5%. These differences underscore the importance of considering multiple sources when planning your compensation strategies. ERI’s projections, based on current trends, has wages and salaries moving at an annual rate of 4.1%. Relying solely on one source might not provide a full picture of the market, and integrating insights from various reputable sources can lead to more accurate and well-rounded budgeting.

Including multiple sources, such as WorldatWork, Payscale, ERI, and Mercer, among others, is highly recommended. This approach will aid in your planning process, ensuring a balanced perspective and providing a range of expectations that can help guide your compensation strategy more effectively.

DIFFERENCE BETWEEN BUDGETED AND ACTUAL INCREASES

Another key point is the distinction between budgeted increases and actual wage movement. While companies may budget for increases based on planned merit or cost-of-living adjustments, the actual increase in payroll costs often ends up higher. This discrepancy is typically driven by factors such as:

-Turnover: Replacing employees often requires offering higher salaries to attract new talent.

- Promotions: Employees moving into higher roles generally receive substantial salary bumps.

- New Hires: Market conditions may necessitate offering new hires salaries above the established range, especially in competitive sectors.

VARIATION BY INDUSTRY SECTOR

The movement of wages in 2024 varied significantly by industry, with figures ranging from 5.1% in some sectors to just over 2% in the IT industry. This highlights the critical importance of understanding industry-specific trends when setting pay policies. For example, while sectors like healthcare and transportation saw stronger wage growth, others like information technology experienced more subdued increases.

CONCLUSION: A STRATEGIC APPROACH TO COMPENSATION

As employers begin planning for 2025, it's essential to take a strategic approach to compensation, ensuring that budgeting is based on a comprehensive view of market conditions. Blue Whale Compensation’s tools, such as BlueComp, can assist companies in staying competitive by offering insights into wage movements and helping adjust pay scales accordingly.

For more information on how to leverage these insights and tools for your organization, please contact a BlueComp representative.

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Jul 8 2023
Merit and Pay Increases for 2024

Paycheck Increases For 2024: What Can Employers Expect?

Blue Whale has prepared the following summary advisory report on the current market and economic conditions to provide insights into how these factors may impact companies’ decisions regarding merit and pay increases in 2024.

U.S. Wage Increases in 2024

A) White-Collar Jobs

Pay increases in most white-collar roles are expected to slow down in 2024. This deceleration can be attributed to the economic outlook and general business sentiment prevailing in the market. For example, according to the World Economic Forum, most chief economists expect moderately weakened growth in the United States and Europe. Pay freezes – uncommon over the last three years- have become increasingly common as companies face economic headwinds and undertake job cuts. For example, SalesForce, Microsoft, and other leading employers have announced no salary raises for full-time employees in 2023, indicating a shift in the approach adopted by some major organizations.

B) Blue-Collar Jobs

On the other hand, and perhaps due to minimum wage increases in states like California, Washington, and other larger metropolitan areas, blue-collar roles will likely experience continued above-average wage growth in 2024. Beyond increases in the minimum wage, the other drivers for this upward trend are the scarcity of skilled labor and increased demand. Industries such as construction(1), manufacturing, mechanical, supply chain, and transportation, facing workforce shortages, are expected to offer higher wages to attract and retain talent.

c) Overall Projection: Wage and Salary Movement

Based on a review of wage growth, wage/salary movement for 2024 is likely to match or come in only slightly below 2023 levels. Projected pay movements for 2024 are as follows:

  • 4.8% for managers and executives
  • 5.1% for professional administrative positions
  • 5.2% for hourly administrative positions
  • 5.0% for production and blue-collar classifications

D) PROJECTED MERIT INCREASES, BUDGETS: 2024

In setting up budgets, it is essential to understand the difference between overall wage movements and planned increases. Overall wage movements include several personnel decisions impacting an employee's paycheck, including promotions, cost-of-living increases, salary adjustments, adjustments to meet new minimum wage guidelines, and merit-driven increases.

On the other hand, planned increases are the budgeted payroll percent increases set by employers for employee increases. Typically those increases are merit-driven, tied to an employee's performance; however, some companies have plans that call for a flat percent increase for all employees. Generally, depending on industry, and other labor factors, budgeted payroll increases trail overall wage and salary movements by .5% to .75%.

As we look ahead to 2024, a number of publications are forecasting budgets for increases ranging between 4.0% and 4.2%.

Understanding today's market is essential


As employers begin to budget for 2024, organizations must conduct wage benchmarking exercises promptly to assess their position relative to the market. Failure to benchmark wages may result in companies being unaware of potential disparities in market pay. According to the Bureau of Labor Statistics wage and benefits growth tracker, US wages across all jobs have increased by 5.0% as of May 2023. However, it is essential to recognize that specific roles in local markets may have experienced higher growth rates, potentially exceeding the overall average.

To illustrate the impact, let's consider a scenario where the market pay for critical roles has risen 8% in the past year. If a company granted its employees a 4% pay increase, they may unknowingly fall behind the market heading into 2024. To bridge this gap and remain competitive, the organization may consider providing an additional 4-5% increase, considering the observed market pay increases.

Our Software HELPS ORGANIZATIONS Maintain Market Parity

If keeping track of market movement is part of your organization's strategy, our compensation software, BlueComp can help. Developed by Blue Whale Compensation, BlueComp is a game-changing cloud-based compensation management application that stands out from the competition. What sets BlueComp apart is its remarkable ability to offer robust features and functionality as a freeware app. While competitors often charge monthly fees that can reach thousands of dollars, BlueComp provides unparalleled value at no cost. BlueComp is available as a freeware application. Its rich and robust compensation management features are ideal for organizations moving from spreadsheets to cloud-based applications. BlueComp comes with a wide range of features:

  • Track Market Movements
  • Easily Compare the Market Value for Different Jobs across multiple locations
  • Manage Pay Bands by Location
  • Easily Edit Employee Data
  • Simple Visual Representation of Salary Structure
  • Salary Suggestions and Compensation Assistant
  • Employee-level Suggestions for Reducing Pay Gaps
  • Market Differences stats to manage costs, address pay gaps, and keep pay in line with the company's compensation philosophy

Maintain Market Standing with BlueComp's Dynamic Market Capabilities

The estimates used by BlueComp to determine annual compensation changes come primarily from the Employment Cost Index (ECI). Published quarterly by the Bureau of Labor Statistics, the ECI is a comprehensive index that tracks wage and employee-related costs across various industries and sectors.

By leveraging ECI data within their BlueComp account, clients can make informed decisions, refine their budgeting, and ensure their compensation strategies remain competitive and responsive to market conditions.

As of 8/1/2023, all BlueComp accounts have been updated with the latest ECI figures. These figures are based on major industry sectors, metro areas, and employment size.

For more information on wage/salary escalation and how to interpret or use your account's information, contact a BlueComp representative today.

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Jun 6 2023
The Power of Incentives: How Bonus and Incentive Plans Propel Companies to Success While Controlling Payroll Costs

How to Develop Bonus and Incentives Plans that Get Results

A common denominator in companies that excel is comprehensive and impactful incentive and bonus plans that drive the organization’s growth and achievement of critical goals. A well-designed program can motivate employees, improve performance, and fuel organizational growth. In addition to their impact on success, bonus and incentive plan also serves as a great way to control payroll costs. In this article, we will delve into the top five reasons why US companies with bonus and incentive plans are far more likely to succeed than those without while effectively managing their payroll costs.

Performance-Based Compensation

Bonus and incentive plans provide a performance-based compensation structure that links rewards directly to individual or team achievements. This approach allows companies to reward high performers while ensuring that compensation aligns with the value created. By incorporating performance metrics and targets into incentive plans, organizations can control payroll costs by rewarding top performers who contribute significantly to the company’s success.

Cost-Effective Retention Strategy

Employee turnover can be a significant drain on an organization’s financial resources. According to a 2022 study by Keep Financial, 86% of employees would stay at the company for a period of time in exchange for a cash bonus. Bonus and incentive plans offer a cost-effective retention strategy by providing rewards and recognition to high-performing employees. By motivating and engaging employees through these programs, companies can reduce turnover rates and the associated costs of recruitment, training, and lost productivity.

Variable Compensation Structure

Unlike fixed salaries or traditional pay scales, bonus and incentive plans introduce a variable compensation structure that allows for flexibility in payroll costs. These plans can be designed to align with the company’s financial performance, ensuring that compensation expenses are directly tied to business results. During periods of economic downturn or financial constraints, companies can adjust the bonus and incentive payouts to control payroll costs without sacrificing employees’ overall motivation and performance. To best measure and calibrate a plan, companies should consider four key plan design principles:

1. Ensure accurate measurement

Align payout curves with organizational expectations and ensure that incentives for performance are aligned with accurate measures of financial results. Objectives, in addition to financial goals, can be qualitative in nature. For example, building customer loyalty, raising quality objectives, or elevating employee morale, can be key organizational goals.

2. Balance short-term and long-term incentives

Determine the proper mix of short-term and long-term incentives. Short-term incentives are usually aligned to annual revenue or profit objectives; long-term incentives, on the other hand, are generally linked to added shareholder value over a longer period of time.

3. Promote compliance

Plans must be designed to maximize tax benefits for the company (and its employees) and do not violate any IRS rules. This applies not only to public companies but also to private companies. Investors and/or company owners are demanding greater accountability on incentive plans and how they are aligned to value creation.

4. Keep the plan workable

Simplifying compensation plans is crucial to ensure their effectiveness, as overly complex plans can be incomprehensible for participants. The key is to maintain simplicity in goal setting, award calculation, and the number of metrics involved. Ideally, limiting the metrics driving awards to three to five is advisable.

From: The Controller’s Report (Issue 13-7)

Cost Containment through Goal Setting

Bonus and incentive plans enable companies to define specific goals and targets that align with the organization’s strategic objectives. By setting ambitious yet attainable goals, companies can channel employees’ efforts toward driving performance and achieving desired outcomes. This goal-oriented approach helps control payroll costs by allocating incentives to individuals or teams who meet or exceed predetermined benchmarks. It allows companies to focus on rewarding exceptional performance rather than providing across-the-board salary increases.

Return on Investment (ROI)

Bonus and incentive plans can be seen as an investment in driving employee performance and organizational success. When properly designed and implemented, these programs yield a positive return on investment. A study published in the Journal of Labor Economics found that incentive pay significantly increased productivity, with the average return on investment ranging from 30% to 50%. By strategically allocating resources to reward high performers, companies can control payroll costs while reaping the financial benefits of improved productivity and business outcomes.

Calibrate Budget and Payouts

When setting bonus levels, consider the 80/20 ratio: Set your payout at a level where only 20 employees reach no more than 80% of the payout. If more than 20% of employees get more than 80% of the projected payout, your goal is too low. Ideally, the rule is that the bonus budget should payout only 60% of the targetted goal.

Set Realistic Bonus Levels

In deciding the amount of a bonus, one should consider budgets, payout, number of employees in the plan, objectives, ROI, and the total cost at the end of the plan year. Additionally, the payout must be attractive enough to be meaningful to employees. Although there are a variety of plan models, the typical bonus amounts, expressed as a base of regular pay, are as follows:

Conclusion: In addition to their impact on motivating employees and driving organizational success, bonus, and incentive plans offer companies an effective way to control payroll costs. These programs provide a performance-based compensation structure, act as a cost-effective retention strategy, introduce variable compensation, allow for cost containment through goal setting, and offer a positive return on investment. By leveraging the power of incentives, companies can strike a balance between rewarding exceptional performance and managing payroll costs, ultimately propelling their success in the competitive business landscape.

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May 30 2023
Best Plans to Reward High-Performing Employees

How to REWARD HIGH-PERFORMING EMPLOYEES

Instead of a more traditional annual review focusing on equitable pay among staff members, employers should consider compensating their employees, especially high-performing employees, based on merit and job performance over a predetermined period.

Advantages

  • Increased motivation-employees will be incentivized and, as a result, become more enthusiastic about doing a job well done
  • Higher work standards will be set to meet performance
  • Differentiation between staff who is is over/underperform-higher performing employees will be recognized for their job well done
  • More clearly defined company goals and objectives- employees will understand and deliver on work expectations which will lead to increased productivity and retention
  • Recruitment- there will be further opportunities for pay and advancement, which will intrigue job applicants

Disadvantages

As your organization looks to implement a merit-based compensation plan, consider the downfalls, including increased employee competition and employee bias:

  • Without clear standards on merit pay may be awarded, merit-based pay is subject to interpretation and bias from each individual’s supervisor
  • Employees may begin to expect raises and forget about the performance aspect of pay
  • Instead of unifying the interest of the company, merit pay can bring competition within the workplace
  • Lack of communication and understanding- it is important for the supervisor to clearly define and explain to employees how the merit pay system works

Set up Merit-Based Pay

As listed above, setting up a merit-based pay structure has advantages, including increased employee motivation and retention. Before implementing a merit-based pay structure, there are important steps to take, as indicated below:

Consider budget implications

Before implementing the merit-based pay policy, to better understand and account for the future, establish a budget for pay that may be rewarded for employee performance.

Develop Policy

It is important to have a consistent, documented merit-based policy that clearly defines how employees will be awarded additional pay for their performance based on existing metrics and timetables.  This will help eliminate bias and inconsistent merit-based pay within the workplace.

Communicate

Once your organization has decided to implement the merit-based plan, set standards, and account for budget implications, develop a communication strategy to communicate with your staff what is expected of them clearly and the company standards.

Clearly Communicate:

  • Company Objectives and timeline
  • Merit Standards
  • How merit pay will be calculated
  • Departmental and individual goals

Software Consideration

To eliminate the risk of error and to streamline operations, it is recommended that your organization utilizes software to track salary data and the merit pay structure.  The software can also help your organization evaluate metrics and the success of the merit-based pay system. 

Summary

Merit pay can go a long way by showing your organization that you honor their hard work and dedication. Employees will begin to feel appreciated, work harder, and display higher retention levels.

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May 30 2023
California’s Pay Transparency Law- SB 1162

California’s Pay Transparency Law- SB 1162

Implications

California’s Pay Transparency Law-SB 1162 is making headway. The state legislature approved the bill on Monday, September 13, 2022.  California’s Governor Gavin Newsom has until September 30, 2022, to enact the bill. 

This new law would require all employers in California with fifteen or more employees to include the hourly rate or salary range on their job postings. In addition, upon request, employers would be required to provide the pay scale to their staff, and employers would be required to submit data payroll data to the state annually broken down by the demographics of their organization.

Employer Implications

California’s Pay Transparency Law-SB 1162 is making headway. The state legislature approved the bill on Monday, September 13, 2022.  California’s Governor Gavin Newsom has until September 30, 2022, to enact the bill. 

This new law would require all employers in California with fifteen or more employees to include the hourly rate or salary range on their job postings. In addition, upon request, employers would be required to provide the pay scale to their staff, and employers would be required to submit data payroll data to the state annually broken down by the demographics of their organization.

Groundbreaking State

The state of California is home to many groundbreaking changes in employment law.  California’s Equal Pay Act requires employers in the state to disclose the pay range for positions they’re recruiting for to applicants upon request. In addition, employers within the state with at least one hundred employees are required to submit payroll data to the state annually.

California is now setting a groundbreaking precedent by adding an additional layer of transparency. California would be the first jurisdiction to require employers to distribute payroll data based on the demographics of the organization.

What are the implications of Law-SB 1162?

  • This new law would require all employers in the state of California with fifteen or more employees to include the hourly rate or salary range within their job postings
  • Upon request, employers would be required to provide information on what they’re paying their staff members
  • Employers with one hundred or more staff members would be required to report to the state annually the median and mean hourly rate for each job category broken down by race, ethnicity, and sex
  • In addition, employers with one hundred or more workers through labor contracts would also be required to submit similar data annually
  • All employers would be required to record their individual employees’ job title and wage history during employment and for three years post termination

California Fair Pay Act-SB358

The California Fair Pay Act-SB358, originally enacted in 1949, was amended on October 6, 2015, to address pay disparity among men and women within the workplace.  The amendment requires employers only to rely on relevant factors to determine pay differences for their staff who perform substantially similar work. Such relevant factors include seniority, merit, quantity or quality of production, or a bona fide factor such as education or experience.

SB358 was also amended to protect employees who wish to discuss their pay with their coworkers openly, and it prohibits employers from retaliating against their staff for doing so.

Employer Liability

SB 1162-Failure to file the required reports or disclose the required information to the state of California would bring penalties to employers for non-compliance. In addition, employees would be eligible to file a complaint with the labor commission, which could lead to further fines and violations.

SB358-The division of labor standards enforcement enforces penalties for employers who violate SB358. Employers would be subject to back pay, interest, and liquidated damages.

To eliminate liability, employers are encouraged to document pay decisions within company policies and job descriptions based on relevant job factors, including job requirements, responsibilities, and working conditions.

Other Transparency Trends

Salary is an important factor for job seekers and, at times, can be a make-or-break decision whether to apply.  Organizations are starting to recognize this, and the number of job listings with salary information has been increasing. 

Some major companies like Microsoft plan to start disclosing pay on all their job listings more than mandated requirements to recruit qualified candidates. 

In addition, to meet job seekers’ needs, popular job listing websites like Indeed recognize this trend and have acted. Indeed encourages employees to post their salary, and if not provided, they utilize an algorithm to atomically pull salary information based upon the job description and the characteristics provided. 

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