Scottsdale, U.S.A. — Nowhere is the law of supply and demand felt more strongly than in the U.S. labor market. While U.S. unemployment decreased from 9.3 percent to 8.8 percent for the 12-month period ending April 2012 (according to BLS.gov), it was not enough to boost salary budget increases and, subsequently, employee wages.

Pay increase budgets at U.S. employers have picked up slightly from all-time lows in 2009, going from an average (mean) of 2.2 percent to 2.8 percent in 2012, according to the 39th annual “WorldatWork 2012-2013 Salary Budget Survey.” But the movement does not appear to be coming from organizations awarding larger pay increases. Instead, it stems from fewer organizations reporting 0-percent increases, or frozen salary budgets. The number of 0-percent responses has declined from 33 percent of employers in 2009 to this year’s figure of just 5 percent.

“There is an inverse relationship between the spike in organizations budgeting 0 percent and the overall average salary budget increase,” explained Alison Avalos, a Certified Compensation Professional (CCP) and research manager for WorldatWork. “Picture an iceberg thawing and its reflection in the water, with the portion of organizations freezing pay increase budgets represented by the portion of the iceberg visible above the water.

When pay budget freezes spiked in 2009, overall mean and median salary budget increases plummeted, pulled down by the zero values. The overall average salary budget seems to be holding steady at close to 3 percent, but the growth is not because employers are being aggressive with salary increase budgets. It is mostly because the number of 0-percent responses has declined in the three years since the recession.”

With average (mean) salary increase budgets below 3 percent for the fourth consecutive year, managers may be tempted to skip differentiating employee performance altogether. But with such modest salary budgets, pay for performance should actually be more heavily underscored, according to Kerry Chou, a Certified Compensation Professional (CCP) and practice leader at WorldatWork.

“In order to accomplish this, you need to effectively allocate available salary dollars, which could mean low or no raises for marginal performers. And while this isn’t a pleasant conversation for managers to have, in the long run it’s easier than losing your stars to the competition and then spending far greater sums to find replacements. A small pie can still be a great dessert; you just need to serve bigger pieces to fewer guests.”

Other Key Salary Budget Survey Findings:

Major Metropolitan Area Data

Companies located in or reporting data for employees in Detroit reported the lowest overall average salary increase budget at 2.6 percent for 2012, while Houston-area employers reported the highest, topping 3 percent. Most metropolitan areas reported average salary budget increases ranging from 2.7 percent to 2.9 percent for 2012, and 2.9 percent to 3.1 percent for 2013. To see the impact of the slight rise, consider a company with a $100 million payroll. Two-tenths of one percentage point equals $200,000 in additional pay increases.

Industry Data                                                                      

Pay increase budgets for public administration hit an all-time low of 1.3 percent in 2010 and 2011, but have risen to 1.7 percent in 2012. Conversely, the mining industry is far above national figures, with average 2012 salary budget increases at 4 percent.

Variable or Incentive Pay

The percentage of organizations using vari­able pay grew to 82 percent this year, up from 79 percent in 2011. A combination of awards based on organization/unit success and individual performance continues to be the most prevalent type of variable pay program.

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