Salaries yielding to health costs - A "Holistic" View

In traditional HR thinking, there are salary budgets and then there are benefits budgets. But in what might be the leading edge of a trend, 17 percent of the companies surveyed recently by Mercer Human Resource Consulting say they are lowering their 2003 salary increases--or are considering doing so--to offset health-care cost increases.

Mercer surveyed 1,600 employers, asking about their salary-increase budgets for 2003. Eight percent of the companies said they were decreasing 2003 pay increases to offset healthcare cost increases. Another 9 percent said they were considering doing so. Two percent said they were decreasing 2003 pay raises to offset pension-funding requirements. Another 5 percent were considering that step.

Employers are now "taking a holistic view of reward programs, says Philadelphia-based Mercer consultant Steven E. Gross. "Two years ago, companies operated in silos: they made independent decisions for salaries and benefits," Gross says. But as the economy weakened, profits flattened, and health-care costs made double-digit jumps two years in a row, companies began to rethink that approach.

Gross says the trend will grow in the years to come. "This year, 17 percent are saying, 'This is on the table.' Three years ago, you would have gotten under 5 percent."

Meanwhile, other survey results show employers cutting back the raise estimates they had made in mid-2002. In April 2002, employers said they were planning raises that ranged from 3.5 percent for non-union hourly employees to 3.9 percent for executives. When Mercer resurveyed 400 of the employers in October, the companies had a better feeling for final 2002 business results. The pay-increase outlook was less rosy. A third of the employers now reported that they would pay smaller increases: 3.5 percent for executives, and 3.3 percent for non-union hourly workers.

High-performing workers could expect better-than-average raises, however. Employers told Mercer that their top employees could expect average base-pay increases of 5.2 percent in 2003, compared to 3.5 percent for average employees.

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