Pay raises are back, finally, but skimpy

December 18, 2012: 11:25 AM ET

Though they are smaller than they were pre-recession, hardly any employers are handing staffers a thank-you note or a box of chocolates instead of a pay increase.121218041144-pay-raise-measurement-gallery-horizontal

By Vickie Elmer

FORTUNE -- Finally, more than three years after the recession officially ended, salary raises are rolling in again.

Though they are smaller than they were pre-recession, hardly any employers are handing staffers a thank-you note or a box of chocolates instead of a pay increase. Employers also are no longer dragging their feet and waiting extra weeks to deliver these raises, according to research by nonprofit HR association WorldatWork.

This year, the average wait time between raises for U.S. workers has been 12.4 to 12.7 months and next year it is expected to be about the same, according to WorldatWork. This marks a major improvement from 2010, when employers waited an average 13.7 months to offer pay increases to their U.S. exempt salary workers. In the depths of the recession, 10% of employers held off for 36 months -- three years! -- before increasing their salary structures - pay scales that are the benchmarks for determining salaries -  and the average had inched up to 28 months, according to WorldatWork.

The planned timing between raises may be back on track, but that does not mean gains will be generous. Most U.S. workers will earn a raise of around 3%, though some star performers can expect more -- in some cases twice the rate of gain as the average worker a few cubicles away. To put this into perspective, the inflation rate in the U.S. in 2012 has ranged from 1.4% to 3%.

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In the United States, the attitude on raises is mostly, "Take it slow. Take it cautiously…. Let's hold back a little bit," says Kerry Chou, WorldatWork senior compensation practice leader. Amid all the global uncertainty, with problems in Europe, slower growth in China and elsewhere, and the U.S. fiscal debt woes, the short-term outlook for raises is "pretty modest, pretty cautious increases," he says.

Raises have inched up from a 39-year low of 2.2% in 2009 to a 3% gain this year as fewer companies have frozen their compensation budgets. Only 5% of the 2,150 U.S. employers WorldatWork surveyed said they expect to keep all salary levels steady, down from 33% in 2009.

Some companies have kept salary freezes limited to corner office occupants. A report by consulting firm Mercer found that 8.2% of employers planned to freeze company executives' salaries this year. Officers and executives also tend to wait a bit longer for raises than the rank and file, 13.1 months on average, according to WorldatWork.

So, when will these raises roll in? While many union workers receive pay increases on the anniversary dates of their contract ratification, they are the exception to the rule. Most U.S. workers can expect their pay to be bumped up in January, or else sometime in the first quarter. That's because more companies are shifting toward an "everybody gets their increase at one time" model, says Jeanie Adkins, a partner in the reward practice at Mercer, a human resources consulting firm.

"Doing it all on one date tends to improve the ability to spend the money in the most effective way. It's a limited pot of money," says Adkins, and companies do not want to see it run out near the end of the year and not be able to reward top-performing staffers.

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Many compensation professionals are debating whether the smaller pay increases of the last two or three years, averaging 2.5% to 3.0 percent, have become the new normal, WorldatWork's Chou says. "For the past 20 years, prior to 2009, increases varied from 3.5% to 4.5% every year. You could take it to the bank," he says. Now, with rare exceptions for software developers and petroleum engineers and a few other jobs, the average raises are more modest.

Mercer's salary survey shows that the highest performing workers -- 8% of the total workforce -- could expect average increases of 4.5% next year. The worst performers will likely get next to nothing -- 0.1 percent raises, according to Mercer.

As for whether raises could grow larger in a few years, Mercer's Adkins says that depends largely on economic and employment growth ahead.

Even if raises remain modest, she notes, many people will collect higher paychecks by getting promoted. Those salary increases could be as high as 15%, and at most companies, they come from a separate pay budget. That would be a big boost; a new WorldatWork survey found the average promotional raise for salaried workers was 8.7% this year, while executives averaged 10.2%.

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