2013/2014 Salary & Benefits Planning & Budgeting Guide

We’ve compiled a brief compensation and benefits planning and budgeting guide to help your organization make important pay, health care, and benefits decisions this fall and into 2014. The guide summarizes the latest and most important trends we’re seeing related to administering compensation, health care, and benefits, which affect your organization as it plans for 2014.

Employers project 2.9%-3.0% pay increases for 2013/2014.

Salary budget planning surveys for 2013/2014 consistently report average actual pay increases of about 2.9% for 2013 and project pay increases of 2.9%-3.0% for 2014 for most levels of employees, in line with increases of last year. A breakdown of the projections from these surveys is summarized below.

Table 1: Average Pay Increases for 2013/2014

Source: ERC, Mercer, Hay Group, WorldatWork, Aon Hewitt, The Conference Board, Culpepper

Table 2: Average Projected Pay Increases for 2013/2014 (Northeast Ohio Only)

PMS-NU: Production, Maintenance, and Service Positions (Non-Union), PMS-U:Production, Maintenance, and Service Positions (Union), CT: Clerical and Technical Positions, SMP:
Exempt Supervisory, Management, and Professional Positions, EXEC: Executive Positions

Average pay increases for high performers rose from 2012.

Numerous surveys, namely those conducted by Mercer, Aon Hewitt, and WorldatWork suggest that employers are differentiating pay increases by performance level. Higher performing employees tend to receive higher pay increases above the average increase, while lower performing employees tend receive lower pay increases below the average increase. Average increases for top and average performers rose in 2013 when compared to 2012.

According to WorldatWork, an established best practice is that top performers should receive increases of at least two times those received by average performers, yet the actual ratios tends to be lower, as shown in the table below.

Table 3: Average Pay Increases for 2013 by Performance Level

Pay freezes continue to decline.

The percentage of employers not providing pay increases or freezing pay continues to decline across nearly all compensation planning surveys. For example, in the 2013-2014 ERC Wage & Salary Adjustment Survey, 96% of employers are projecting providing pay increases in 2014. This rose from 95% in 2013, 88% in 2012, 82% in 2011, 59% in 2010, and 55% in 2009. This trend, validated in other survey reports, suggests that more employers are providing pay increases compared to the past few years.

Funding of bonuses remains consistent with past years.

According to a survey 2013 released by Towers Watson, U.S. companies are expecting to fund bonuses at 87% of the target, which is the same as last year’s target level. Based on the historical findings of the survey, in the past eight years, U.S. organizations have fully funded bonus pools twice, in 2006 and 2010. The survey results suggest that employers are continuing to take a conservative approach to funding their bonus pools, as they have in recent years, in light of the uncertain economic conditions.

Employers need to provide employees with notice of health care coverage options by Oct. 1.

As a reminder, under the Affordable Care Act, employers must provide written notice to employees of coverage options available to them through the Health Insurance Marketplace by no later than October 1, 2013. Additionally, as amended by the Affordable Care Act, the Fair Labor Standards Act’s new requirement includes two notices: a notice for employers who offer employer-sponsored coverage and a notice for employers who do not offer employer-sponsored coverage.

All active employees must receive the notice before October 1, 2013, even if they are not enrolled in an employer-sponsored health plan. Individuals will be able to enroll for coverage in the marketplace beginning on October 1, 2013 with coverage beginning January 1, 2014.

Current and projected health care costs continue to be moderate.

A survey conducted by Towers Watson shows that the average total cost of health care is projected to rise by 5.2% in 2014. Similarly, a new survey conducted by the National Business Group on Health reports that U.S. employers can expect an average increase of 7% in health care costs for the third consecutive year. In addition, a survey by PriceWaterhouseCoopers reports average health care costs of 6.5% for 2014, down from 7.5% last year. Meanwhile, research conducted by Kaiser and ADP shows even lower increases. Specifically health insurance premiums for job-based family coverage rose moderately by 4% and the average cost of single employees’ health insurance premiums rose by 5%, according to Kaiser, and ADP’s research shows that the average rise in premium has become more moderate in the last year (3.1%).

ERC’s latest 2013 ERC/Smart Business Workplace Practices Survey also reflects similar trends on a local level. Average premium increases reported by respondents in Northeast Ohio hovered around 8%, down two percentage points from 2012.  Despite the modest rises in premium, the average percent of premium that employees make towards their health insurance rose to 26.7% in 2013, up from 24.9% in 2012.

Health care reform delay means employers will need to prepare in 2014.

Employers will have short-term relief from the delay of the Affordable Care Act’s employer mandate and shared responsibility penalties, as these have been delayed until 2015, however, there are still a number of decisions related to the law that employers will be faced with over the next year. Among these, include:

• Determining whether they will use public or private exchanges as methods of providing health care
• Continuing to put into place cost-management practices since premiums are expected to rise over the long-term
• Preparing for major compliance provisions in 2015 by adapting to new tracking and reporting requirements and the extension of coverage to employees working 30 or more hours per week
• Answering questions that employees have about the exchanges/establishing processes and systems for interacting with the exchanges.

More education about health care from employers is needed.

A number of recent studies are confirming the need for more education by employers surrounding health insurance. Surveys by Fidelity Investments, the American Institute of CPAs, and Kaiser show that employees do not properly understand the basics of health insurance, health savings accounts, and health care reform, which suggest that employers need to do a better job of communicating health care benefits to employees. Upcoming open-enrollment is an ideal time to do this.

Voluntary benefits becoming more important.

Voluntary benefits and services are expected to become more important over the next five years, according to research conducted by Towers Watson. Specifically, the importance of these benefits is expected to grow by 27%.

The most common voluntary benefit offerings currently provided by respondents include life (94%), vision (84%), disability (80%), dental (80%), and accident (68%) insurance. The most common offerings being considered by respondents are critical illness and identity theft insurance, as well as financial counseling. Fewer employers currently offer critical illness insurance (35%), identity theft insurance (25%), and financial counseling (44%).

In summary, pay increases, bonuses, and health care cost increases seem to be remaining stable for now, but the Affordable Care Act’s impact will continue to present challenges for employers in terms of compliance in 2014 and beyond. Be sure to stay tuned for more trends, research, and guidance with regard to managing pay and benefits in the upcoming year.