Pay forecast: Tough climate for raises

A Christian Science Monitor/TIPP poll

Don't plan on a big wage hike next year.

While layoffs have justifiably garnered bigger headlines, salary pressures are a parallel workplace trend in today's go-slow economy.

• Some companies - from ailing airlines to high-tech firms - have had to cut pay by as much as 15 percent.

• Other employers are freezing salaries, leaving workers adrift against inflation.

• Many are making employees pay more of the cost of benefits such as healthcare.

While salaries are still rising on average, these trends are eating into the spending power of many American households at a time when the economy seems stuck in low gear.

With unemployment in November jumping from 5.7 percent in October to 6 percent last month, the highest in nearly nine years, most employers do not need to be generous.

"There isn't the pressure to chase people with more dollars in their paychecks," says Steven Gross, a compensation expert in Philadelphia with Mercer Human Resources Consulting.

The tougher paycheck climate comes at a time when other factors, from the stock market to a possible war in Iraq, have kept consumers on edge.

In a new Christian Science Monitor/TIPP poll, an index of Americans' economic optimism fell a point, to 53.3 from 54.4 in November.

The same poll found that, even though official numbers show personal income rising in the past 12 months, many people say they are earning less.

While 46 percent said their salary had not changed, 27 percent said salary changes had left their households with less money to spend. Only 22 percent said salaries had changed for the better.

At the same time, nonsalary compensation is squeezed. The poll found that, by a 4-1 margin, changes in bonuses, stock options, and the like have been for the worse, not better, in the past year.

Such results sometimes reflect a mixture of perception and reality. But recent trends are clearly much different from the late 1990s, when salaries rose steadily in most industries.

Conductus Inc., a Sunnyvale, Calif., high-tech firm, slashed pay for its 60-plus employees by 15 percent in October.

Similar cuts have rippled through pockets of the service sector.

Airlines, facing a sharp slump in revenues, have been especially hard hit. Most United Airlines workers agreed to pay cuts, which could total more than $5 billion as the airline enters bankruptcy proceedings. At Hawaii's Aloha Airlines, four unions representing some 3,000 employees agreed to pay cuts of about 10 percent last month.

But even at firms that are in better shape, pay-raise prospects are not rosy.

Mercer, the consulting firm, surveyed 400 employers this fall and found that almost one-third were planning slightly smaller pay raises next year - 3.4 percent on average for nonunion hourly workers - than they had budgeted last spring.

When inflation of perhaps 2 percent is taken into account, that would mean a real wage hike of about 1.4 percent for those workers.

A "wage trend indicator" compiled by Joel Popkin & Co., Washington economic consultants, has a slightly lower forecast. It suggests average wage increases of 3 percent over the next six months or so.

A similar wage pattern prevailed after the last recession, in 1991. But then inflation was double that of today. Inflation was also very high during the deep 1982 slump. The pay climate today is thus somewhat better, say most experts.

But A. Gary Shilling, a consulting economist in Springfield, N.J., suspects wage cuts are more frequent than at any time since the 1930s and the Great Depression. It has become more "socially acceptable" to do so, he argues.

TO some degree, employers are trying to keep a lid on pay to offset big increases in health and pension costs. Some, too, are charging a larger share of healthcare costs to employees - in effect canceling a portion of whatever wage gains they are handing out.

A Mercer survey of employers, released Monday, finds that the average total health benefit cost per employee rose 14.7 percent in 2002. That's the biggest increase in health-benefit costs since 1990. And these firms were budgeting for a 14 percent average increase again in 2003.

"There's no expectation of that abating," says Mercer's Mr. Gross.

A dramatic increase in worker productivity has helped many companies hold costs down, and avoid pay cuts. Output per hour of work grew at a sizzling annual rate of 5.1 percent in the third quarter.

One reason is layoffs. "Companies are approaching their work force on a just-in-time basis," says John Challenger, chief executive officer of Challenger, Gray & Christmas, an outplacement firm. They quickly employees who are not needed. In 1981 and perhaps 1991, companies had a slower trigger-finger.

In the Silicon Valley area, starting salaries are projected by Robert Half Technology to decrease by 1.3 percent next year. Despite the tech crash of the last two years, few firms actually cut wages of those on the job. If they do, it is often specified as temporary. Wage freezes are more common in financially hard-pressed companies.

"You have to be careful," says Jeff Markham, a recruiting and placement manager. When business picks up, employees demoralized by pay cuts may jump ship, as they often did in high-tech firms during the booming late 1990s.

At Conductus, despite the pay cut, there has been no rush to the door. "It's hard to find a job," explains Sophie Heerinckx, one employee.

Some firms use several other techniques to reduce wage costs. They delay merit increases. They eliminate vacation carryovers. They freeze executive salaries. They trim bonuses. Mr. Challenger sees a major decline in year-end bonuses, especially those that hang on company or department performance.

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