Expect pay raises to return next year

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If there's one thing the past 18 months have taught us it is that it never pays to tempt fate.

Nevertheless, latest research is suggesting what a few months ago would have been unthinkable many American workers and managers will be able to look forward to pay increases and bonuses again in 2010 (touch wood, fingers crossed etc).

After a grim, hairshirt year full of worry and tough decisions, pay will rebound next year, research by consultancy Watson Wyatt has argued.

Some firms may even move to bring levels back to what workers could have expected to be on if there had been a raise during 2009 as well.

Its poll of 235 large American employers has predicted pay will rise by on average three per cent next year, after a year in which raises were cut to the bone, with raises for the year averaging out at two per cent, or even actually reduced in real terms.

The number of companies planning no pay raises next year is also expected to drop dramatically, down from a quarter this year to a tenth in 2010, according to a separate poll of nearly 900 firms by a subsidiary of the consultancy, Watson Wyatt Data Services.

"This has been a very difficult year for both employers and their workers," said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt.

"But there is some good news on the horizon. Employers plan to give larger raises next year, and many plan to reinstate previously cut pay raises as planning for an eventual economic recovery continues," she added.

But there was also likely to be a much closer relationship between performance and pay in the future, the survey suggested.

Companies in general were already giving smaller raises to employees who did not meet performance expectations.

In 2009, for example, workers who only "partially met expectations" received average merit increases of only 0.2 per cent, down from 1.5 percent in 2008.

Workers who "exceeded expectations" this year would receive an average of 3.1 per cent increase, while workers who "far exceeded expectations" could expect a four per cent windfall.

"With companies operating on limited budgets, employees can expect their performance on the job to come under increased scrutiny," agreed Laurie Bienstock, U.S director of strategic rewards consulting at Watson Wyatt.

"Workers who do not meet expectations will see their raises cut or eliminated, enabling employers to reward their best performers," Bienstock added.

Another effect of the recession had been significantly to reduce annual bonus pools, the research found.

Funding for annual incentive awards dropped notably from 99 per cent in 2007 to 82 per cent in 2008, with 2009 expected to come in at 75 per cent, it said.

"Bonuses are certainly a casualty of the recession this year," said Sejen.

"Still, it remains crucial for employers to find ways to reward top-performing workers for their role in contributing to the company's bottom line," she added.

The Watson Wyatt study has come as a UK survey of managers of smaller, AIM-listed, firms, has found that the average salary for the highest paid directors, typically the chief executive, is now around 230,000, with a total reward package of some 460,000.

Total packages at this level tended to be 30 to 40 per cent smaller than in equivalent sized FTSE-SmallCap companies, said consultancy Hewitt New Bridge Street.

Around three quarters of their total reward package was fixed, with the most common long-term incentive arrangement being an option plan.

Nearly two thirds of AIM 100 companies published an executive remuneration report, while a fifth disclosed any bonus cap.

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