Is Watson Wyatt Calling a Bottom?

Posted on July 22, 2009

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According to a July 21 press release from Watson Wyatt, the firm is forecasting a rebound in pay raises for U.S. workers.  The firm’s 2009/2010 U.S. Strategic Rewards survey report found that companies are projecting median merit increases of 3 percent for 2010.

The press release strikes a pretty confident tone:

“This has been a very difficult year for both employers and their workers,” said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt. “But there is some good news on the horizon. Employers plan to give larger raises next year, and many plan to reinstate previously cut pay raises as planning for an eventual economic recovery continues.”

Sounds pretty hopeful. A bit later in the press release, Sejen states:

Bonuses are certainly a casualty of the recession this year. Still, it remains crucial for employers to find ways to reward top-performing workers for their role in contributing to the company’s bottom line.

Should we be cheered by the survey results?

Commenting on the study over at his Business of Management blog, John Hollon is skeptical:

I’m also surprised by the notion of 3 percent raises for 2010, because as much as I wish it were so, I question whether businesses will actually feel confident enough in the economy to go that far when they start their 2010 budget planning here soon. My feeling is companies will be a lot more conservative than that, especially since no one really knows if we have hit bottom on the downturn yet.

I’m inclined to agree with Hollon that we shouldn’t be so quick to get excited about the Wyatt survey. In addition to his point about whether or not businesses will be confident enough to budget for 3 percent raises, I would add another – the unemployment numbers.

Many economists – including Fed chairman Ben Bernanke – are predicting unemployment to remain high for some time. In his semiannual report to Congress on Tuesday of this week, Bernanke testified:

Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate.

Translation: there will be plenty of people looking for work over the next 18 to 24 months.

One more reason to be skeptical, this one gleaned from Ann Bares’ Compensation Force blog. Discussing the Wyatt study, she notes that the findings “appear consistent with the data released recently by WorldatWork.” While Bares is referring to the consistency in what both surveys are showing as far as projected 2010 salary increases, another similarity has to do with how last year’s survey results missed the mark. According to Wyatt’s 2008 research, companies projected merit increases of 3.5 percent in 2009; now, companies are saying 2009 increases will be 2 percent. WorldatWork projected salary budget increases of around 3.8%; actual 2009 budget increases came in closer to 2.2%.

Bottom line: even assuming that the economy has turned the corner, I doubt that the first thing employers will look to do is quickly raise salaries, especially if unemployment stays in the 8 to 10 percent range for an extended period of time. Such slack in the labor market will allow employers to keep a lid on salary increases for some time to come.

Posted in: Compensation, Economy