Pulling Back Pay Raises

For the first time in nine years, many white-collar workers will get pay raises of less than 4% in 2002, according to a report released Monday. The Conference Board survey is the latest indication that compensation gains are slowing, and raises concerns among economists that smaller raises could dampen consumer spending and economic growth.

A majority of workers will get the traditional 4% pay increase, but a larger share of employees will see lower raises this year than they received in the last several years, according to the survey of 533 companies conducted by the New York-based, nonprofit business research organization.

“An increasing number, but not a majority, are going to be getting less than 4%,” said Charles Peck, compensation specialist for the board. “That’s a fairly significant comedown. For year after year, hardly any company has been budgeting less than 4%.”

Peck said companies are pulling back because of the recent economic downturn and uncertainty in the wake of the Sept. 11 terrorist attacks, the Enron Corp. meltdown and other corporate scandals.

Wage growth typically slows at the start of a recovery, economists said.

“Salary increases are a lagging economic indicator--a function of what happened yesterday as opposed to today,” said Sung Won Sohn, chief economist for Wells Fargo & Co. “Employees and labor unions are reluctant to demand higher wages when the labor market is so soft, and businesses are reluctant to hire people.”

The Conference Board report added to worries that the strong consumer spending that has buoyed the economy may not be sustainable.

Slower wage gains “limit buying power,” Sohn said. “It helps hold down inflation, but also it keeps economic growth modest, and that means you tend to have a jobless recovery. It limits ability to spend money, so demand is limited.”

Of the three employee categories listed by the Conference Board--executive, exempt, and nonexempt--the lowest-paid group is bearing the brunt of the salary retrenchment. The typical pay hike for clerical workers will drop this year to an average of 3.7% in all six industries surveyed: banking, services, insurance, manufacturing, trade and utilities.

By contrast, executive pay raises are holding steady across the board at 4% this year. The picture is mixed for managers, supervisors and professionals who are falling back in manufacturing, trade and utilities, but holding firm in other industries.

Shrinking pay raises come after many companies have imposed layoffs and hiring freezes. Bonuses have been slashed, and many stock options are underwater. Still, with inflation expected to rise 1.5% this year, even secretaries will come out ahead.

“There is a nice little buffer, a real earnings gain,” Peck said. “People look at 4% and say that’s pretty paltry, but inflation is 1.5%. That makes a real difference.”

Employers surveyed said they anticipated returning to median pay hikes of 4% in 2003, but real gains will shrink if inflation rises 2.6% as projected.

The annual Conference Board survey does not look at the wage trends of blue-collar workers, but government statistics indicate slowdowns there as well, said Lawrence Michel, an economist and vice president of the Employment Policy Institute, a Washington-based think tank.

“This is the consequence of the higher unemployment,” Michel said. “Workers don’t have the ability to push their case with their employers, so the companies are able to set the wage growth low. We’ve already seen it in blue-collar workers.”

Slower wage and salary growth may help corporate bottom lines, but it comes at a price, he said.

“Consumption has been holding up the economy, so less wage growth may dampen consumption,” Michel said.

“Other elements of demand are faltering. We really need consumption growth to generate a strong recovery. If wage growth slows down, that will hurt perhaps the speed of the recovery.”