Research from Aon Hewitt, the global talent, retirement and health solutions business of Aon plc, reveals salary increases for U.S. workers in 2014 are expected to reach their highest levels in six years. Still, average increases are projected to remain modest, as employers strive to reserve the majority of their compensation budgets for merit increases and performance-based awards for high-performing workers.

According to Aon Hewitt, salary increases have inched upwards year-over-year after reaching an all-time low of 1.8 percent in 2009. Aon Hewitt's 2013 U.S. Salary Increase Survey of 1,147 companies found that salaried exempt workers are projected to see base pay rise 3.0 percent in 2014, up slightly from 2.9 percent in 2013. This is the highest level since 2008, when salary increases were at 3.7 percent for salaried exempt employees.

"While it appears that pay levels are slowly rebounding, we're still far below pre-recessionary levels of compensation spending as companies continue to hold the line on fixed costs," said Ken Abosch, compensation, strategy and market development leader at Aon Hewitt. "Salaries represent the largest portion of employer costs today. With a sizable talent pool available and increasing global competition for goods and services, companies aren't feeling tremendous pressures to increase base pay to attract top talent. Instead, they are executing on a pay-for-performance vision that rewards employees based on a mix of business and individual results." 

Aon Hewitt Salary Increase Survey: Historical U.S. Salary Increases 

Rewarding Top Performers
Aon Hewitt's survey shows employers would like to allocate a majority of their salary increase budgets towards high-performing workers. In 2013, top performing workers saw average increases of 4.7 percent, almost two times the amount the average worker (those who met expectations) received at 2.6 percent. Employees who did not meet expectations received average increases between 0.2 percent and 0.9 percent.

"With conservative budgets and increasing pressure to attract and retain the best talent, companies are still being overly generous towards workers who are underperforming," noted Abosch. "We think this often undermines the effectiveness of their pay-for-performance messaging by watering everyone's increases down. Instead of rewarding low-performers, organizations should reallocate that money towards those who have helped achieve strong results." 

Performance-Based Awards
According to Aon Hewitt's survey, an increasing number of companies continue to use broad-based variable pay programs— or performance-based awards that must be re-earned each year— as a way to reward top-performing workers.

Ninety percent of companies offer a broad-based variable play plan and expect to spend 12.0 percent of payroll on variable pay for salaried exempt employees in 2014. This is up significantly from a decade ago, when just 78 percent of companies offered a variable pay program, with an average increase of 9.5 percent of payroll.

"We've seen a dramatic shift in the mix of compensation over the past decade, with variable pay assuming the largest component of compensation growth," added Abosch. "Performance-based awards are attractive to employers because they tie employee compensation to business results and help give them more control over their costs. There is also a tremendous upside for employees—particularly those who are high-performing workers — because they have the opportunity to be rewarded for exceeding their goals. Regardless of economic conditions, variable pay programs will continue to be the primary way employers differentiate rewards in the future."

Aon Hewitt Salary Increase Survey: Spending on Variable Pay as a Percent of Payroll

Salary Increases by City
According to Aon Hewitt's survey, workers in some U.S. cities can expect to see salary increases higher than the national average in 2014. These cities include Kansas City (3.2 percent) and Denver (3.2 percent). Cities that can expect lower-than-average increases in 2014 include Boston (2.8 percent) and New York (2.8 percent).

Salary Increases by Industry
The industries that can expect to see the highest salary increases in 2014 include energy/oil/gas (3.9 percent); construction/engineering (3.5 percent); and mining/milling/smelting (3.3 percent). The lowest increases are projected to be in education (2.6 percent); health care/medical services (2.5 percent); and government (2.2 percent).