Pay raises smallest since at least mid-1970s, surveys find

NEW YORK -- U.S. employers this year and next are handing out the smallest pay raises since at least the mid-1970s -- well below the 4 percent-plus increases routine before the economy lost its footing.

Companies surveyed in two studies said they have budgeted raises averaging 3.3 percent to 3.5 percent this year and plan about the same next year.

The belt-tightening reflects rising worker health-care bills and pension costs and a weak economy that has made it difficult for companies to raise prices for their products, according to a survey to be released today by Mercer Human Resources Consulting.

Also, the small raises reflect the anemic job market, with its oversupply of workers, according to the Mercer survey and another put out last month by the Conference Board, an industry research group.

"People are flogging their workers to get more out of them as a means to increase profits, coupled with the fact that there's more supply than demand for labor today," said Steven Gross, a compensation consultant for Mercer.

That approach is evident in companies' early planning for next year. Employers in both surveys said they expect to grant median increases of 3.5 percent in 2004. With inflation, employees will see real gains of less than 1 percent this year and next.

Compared to inflation

Over the past 10 years, pay increases have topped the rate of inflation by between 1.1 and 2.6 percentage points, according to the Mercer survey.

"That's really the whole key. It's not the percent size of the increase. It's the increase relative to inflation," said Charles Peck, compensation specialist with the Conference Board. "It's getting a little bit tight."

Pay raises averaged about 5 percent in the early 1990s before slowing to nearer 4 percent in the latter half of the decade and the early part of this decade.

Inflation is expected to hover around 2.6 percent this year and 2.7 percent next year.

The findings in the surveys are supported by another recent report by business publisher BNA Inc., which said that the layoffs that are increasing the surplus of workers should limit pay raises for months to come.

About 12 percent of the companies surveyed in the Mercer study have imposed a pay freeze for at least some of their workers this year, down from 16 percent in last year's survey.

The Conference Board survey found companies increasing overall compensation by 3.5 percent this year, with plans for the same increases next year. This year is the first time the figure has fallen below 4 percent since the Conference Board began tracking salary increases in 1975. The previous low was a string of 4 percent readings in 1994 through 2002.

The Conference Board survey includes data from 531 companies out of about 2,700 that received the questionnaire in April and May.