Inflation ease-up brings cut in employee raises
Washington — For many corporate employees, the slowdown in inflation may be a mixed blessing. True, inflation is now nibbling rather than chomping on consumers' incomes. But at the same time, rapid increases in consumer prices are no longer prompting employers to beef up raises.
And since it's now tougher to raise prices, companies are keeping an especially tight watch on costs, so they will tend to be slow hiring back laid-off workers, experts say.
''Costs are going to be watched very carefully and the work force will be kept as trim as possible,'' says Audrey Freeman, an economist with the Conference Board.
Prompted by lower inflation and continued high unemployment, a number of companies are trimming the raises they planned to award in 1983.
Last fall Hewitt Associates, a compensation consulting firm, surveyed clients and found the average raise in 1983 would be 7.1 percent. But the firm is getting ''lots of calls from clients saying 7 percent strikes them as too high, '' says Peter Egan, a Hewitt partner who now thinks raises will average ''between 5 and 6 percent.''
The spate of recent shaving of salary budgets comes after major reductions were made as companies planned 1983 budgets with forecasts of lower inflation in mind.
''We saw the big lowering [in the budget for raises] coming last year,'' says Thomas Greeley, a principal at Towers Perrin Forster & Crosby, another compensation consulting firm. ''People dropped their previous year's budgets of 10.5 percent down to the 6 to 7 percent range,'' he says.
Last year, for example, the typical raise for employees at Anchor Hocking Corporation was between 8 and 10 percent. This year, wages at the Ohio-based maker of household, hardware, and packaging products will be boosted only 4 percent, company officials say. Last year earnings plunged to $1.25 a share, from $2.89 in 1981.
''Disinflation has been going on for at least a year, making price increases difficult to obtain,'' says Anchor Hocking senior vice-president Paul J. Dunphy. ''So the name of the game is productivity improvement and cost containment.''
An increasingly popular way of cutting the salary budget is to increase the interval between raises. Companies are saying, ''You won't be reviewed for 15 months,'' says Mr. Egan at Hewitt. ''On an annual basis they have given you less, but you do not feel like it.''
Of course, not every company is cutting its salary budget. ''It is related to the financial health of the company and the health of the industry,'' notes Chuck Cumming, managing principal of Sibson & Co., a compensation firm. ''You won't see (reductions) in high-tech, public utilities, financial services, or service generally,'' he says.
Whether or not they are shrinking the size of the average raise, managements are trying harder to give bigger increases to top performers and passing over more marginal employees.
Companies ''are increasing the percentage of employees who do not receive an increase . . . and trying to make sure the best people get considerably bigger increases (than the average) and stay motivated and feel rewarded,'' says Daniel Glasner, senior consultant at Hay Associates, a third compensation consulting firm.
If a company's average employees are getting raises of 6.5 percent, a top performer's increase might be ''as much as 15 percent,'' Mr. Glasner says.
To fund such generous raises, less exceptional employees often get smaller increases. ''In our system someone can get 8 percent,'' says Anchor Hocking's Mr. Dunphy, ''but then someone else gets zero. The average is 4 percent.''
Lower inflation has made it possible for companies to offer lower raises. Economists now expect consumer prices to climb about 3 percent this year, vs. 3. 9 percent in 1982 and 8.9 percent in 1981.
''In the height of the inflationary cycle the psychology was that you . . . couldn't give them less than 6 percent or they couldn't eat or meet their mortgages,'' Mr. Egan says.
''In the last few years merit budgets were inflation-driven,'' says Mr. Greeley at Towers Perrin. ''When inflation came down, it allowed the market rate to sag to a more realistic level, [tied to] the competitive pay market rather than inflation.''
Later in the year the average salary increase could move above 6.5 percent if companies with salary freezes now in effect decided to resume merit increases as the economy improves, Mr. Greeley says. There are some signs this is happening already. Last week Intel Corporation, a semiconductor maker in Santa Clara, Calif., announced it was phasing out salary cuts and wage freezes begun Jan. 1. The phase-out will not be completed until July 1 and requires that profits to continue improving.
While salary increases will be significantly smaller in 1983, workers' inflation-adjusted incomes may actually improve. Real disposable income - income after adjusting for inflation and taxes - will climb 2.7 percent in 1983, vs. a 1.2 percent rise in 1982, according to Robert Gough, senior vice-president of Data Resources Inc., an economic forecasting firm.
One reason real incomes will rise at a faster rate is that companies are slow to fully adjust pay for changes in inflation. ''This year is an opportunity for gain, because companies won't cut back as rapidly'' as the decline in the inflation rate, says Mr. Cumming at Sibson.