Does the 3% raise work for anyone?

Rebecca Greenfield

For the fourth year in a row, the annual pay raise awarded to U.S. employees will hold steady at 3 percent, according to a new study. It’s just another sign that companies have started to rethink the way they compensate employees.

An annual Willis Towers Watson survey of almost 1,000 organizations found that 98 percent of companies intend to give raises this year. But despite some signs of a tightening labor market, employees shouldn’t expect a generous annual bump. Multiple surveys have found that companies will stick with the trusty 3 percent raise figure this year, as in years past.

That’s not to say that some workers won’t see wage growth; it just might not come in the form of the predictable, minuscule, yearly raise.

Employers have started to rethink the annual raise because it simply doesn’t work. “Three percent for a given employee doesn’t have that much impact,” said Laury Sejen, a researcher at Willis Towers Watson. An amount that small doesn’t reward high performers. Even subpar workers know they’re getting a small pay bump. Nobody has a financial incentive to do better.

The ritual has turned into an expensive way for companies to meet employees’ expectations. “The year-over-year increase can be hundreds of millions of dollars. To what end?” added Sejen. “We spend a lot of time on the process. We spend a lot of time trying to figure out how to divvy up that 3 percent. And there’s really not much of a return on investment.”

A few companies, such as GE, have started to consider other ways to compensate employees in more meaningful ways. (And alternatively, to send a message to those who don’t perform.) “We’re at a point where I think we’re going to see a lot of change,” said Sejen.

It’s not clear what that change will be. It’s unlikely that companies will do away with regular pay increases. Employees would revolt and then quit. Performance bonuses already have become an increasingly large part of worker compensation, making up 12.7 percent of payroll as of 2014, up from 3.9 percent in 1988.

Pay adjustments might also come on a different time scale. BetterWorks, a management software company, reviews employee performance every month and adjusts salaries accordingly. Other companies might go in the other direction and consider a longer pay cycle.

No matter the change, companies risk alienating employees. While the best workers could potentially see big changes on their pay stubs, few workers will stand for no raise at all.

“Practically speaking, it would be very difficult for a company to say zero raises,” said Sejen. “There’s a need to remain competitive.”

Not going up

Ninety-eight percent of employers said they plan to give salaried professional nonmanagement employees raises of 3 percent next year for the fourth straight year. For other employees:

Executives …3.1%

Highly-rated salaried employees …4.7%

Average-rated salaried employees …2.6%

Low-rated salaried employees …Less than 1%

Performance bonuses … 11.6%

Source: Willis Towers Watson