Predicting Future Wages is Hard, Even When Budgeted

July 18, 2009

World at Work released the preliminary results for the 2010 salary budget survey.

While its predictions for next year are interesting, what is really fascinating is the difference between predictions and reality for this year.

Back in May 2008, employers looked at their budgets, and predicted raises for the coming year. This survey contains the actual raises given as of May 2009.

In this post, I'll take a quick look the World at Work preliminary data, what our PayScale data show, and take my guess at what the future holds.

Do You Know What You're Worth?

A raise is made up of two parts: changes in your abilities and responsibilities, and general market forces. While the big picture market is bleak, is your employer recognizing all you are worth? Use the free PayScale Salary Survey to find out.

How PayScale Measures Annual Salary Increases

When we at PayScale look at pay trends, we consider the change in pay for this year over last for an employee with a specific set of skills, experience and knowledge, with a specific set of responsibilities, and working for a particular employer at a specific location. We then average over of set of similar employees (e.g., all nurses nationally), to find an aggregate change (increase or decrease) in pay.

As usual, we include all cash compensation types in our measure of pay – base salary, bonuses, commissions, tips, profit sharing, etc.

The salary increase we find for a job is not the same as a raise you, as an employee, should earn. In the last year, you have gained a year of experience in your job, and may have taken on additional responsibilities. Whether those changes in you and your job translate into higher pay depends on the details.

For example, for a software developer 2 years out of school, the on the job experience gained in the last year is tremendously valuable in the market typically leading to a ~7% increase in median pay. Not so much for a senior software developer: going from 14 to 15 years of experience, without any other factors (new skills, greater scope of responsibility), is worth ~0% more.

Our measure of salary increase for a job is different from some other methods, specifically WorldatWork's. The WorldatWork "Salary Budget Increases" measures the increase in salary budget available per employee. This rolls together two components:

The increase in pay for the same job and employee ability (like PayScale salary increase for a job)
The average amount all employees have grown in effectiveness or responsibility in the last year

The second part depends on the mix of workers at a company:

If a company has a lot of senior (maxed out in grade) employees, this would be ~0%.
If a company has a lot of junior employees (new to the job/career), this could be as 4% or more.

Since WorldatWork has roughly the same employers contributing data each year, the mix of employees does not change very quickly, so they have a fairly stable year over year number. I just don't like to mix apples and oranges 🙂

No Pay Cut is the New Raise

The picture is bleak – looking at the change in salary over the last 12 months (July 2008 to July 2009), it is hard to find jobs where the salary is actually going up at all (though we did find a few for Forbes).

If you are doing the same job, with the same effectiveness and scope of responsibility, as last year, it is hard now to argue for a raise for most careers.

The ~0% increase we found for most jobs in the last year is very different from what we found for previous years. For July 2005 through July 2008, most jobs had annual pay increases of 2% to 4%. While there were always some jobs that were not doing well in a given year and getting ~0% increases, this was not typical.

While we don't have many jobs where pay is definitively down – though we do have some, like Investment Banking Associates and Analysts – if the changes we are seeing hold up, I may be telling a different story in six months. As it stands, no pay cut is the new raise.

Past Performance is No Guarantee of Future Results

The WorldatWork salary budget survey had a great record going: for the previous 4 years (and likely much longer), the budgeted increases were always within 0.1% (better than 1 part in 30) of the actual increases reported the next year.

This looked like the magic crystal ball: we could all know what wages were going to do in the coming year, at least in aggregate, by simply looking at what companies were budgeting today.

It turns out, these predictions were not unlike predicting the weather: consistently one of the best predictions for the weather tomorrow is the weather today. These salary budget predictions were similar. Companies generally added or subtracted 0.1% over the previous year's increase, but basically were saying increases next year would be the same as increases today.

And just like the weather prediction, the salary budget prediction misses the really valuable prediction: when the weather is going to turn.

Here is the WorldatWork table for overall salary increases for the United States:

	Actual 2008	Projected 2009	Actual 2009	Projected 2010
Nonexempt Hourly Nonunion	3.8%	3.8%	2.3%	2.8%
Nonexempt Salaried	3.8%	3.8%	2.1%	2.8%
Exempt Salaried	3.9%	3.9%	2.2%	2.8%
Officers/Executives	4.0%	4.0%	2.0%	2.8%

Comparing the first column and second, across job categories, companies in May 2008 were predicting increase for the coming year would be list the year before – there is no change in increase percentage for any category of job.

The comparison of the second and third columns is the shocker. For the first time in over 5 years, the actual in May 2009 did not match the prediction from a year earlier.

How wrong was it? The predictions were between 1.5% and 2% too high. Stated another way, the predictions were between 65% and 100% too high!

That large companies like these, that usually have year-long planning cycles with detailed budgets done well in advance, found that economic conditions forced them to radically change their salary increase plans during the year is dramatic.

Note that these salary increase budgets do not include layoffs or hiring freezes: these data are the salary increase per employee that is still employed.

Once Burned, Twice Shy

These same employers now predict increases for 2010 of 2.8%, halfway in between the actual raises in 2008 and 2009 🙂

It is safe to say, HR professionals, and company salary budgeters in general, do not have a crystal ball to see the future of wages. The average raise next year could be 2.8% (as predicted above), but I would not rule out anywhere from 0% to 5%, given the turbulence we are now in.

It is also safe to say no one has a clear picture whether next year economically will be like the last 12 months, even worse, or getting back to the more stable growth of 2005 to 2008.

I recently heard a very frank discussion by a hedge fund manager whose job it is to decide which companies to buy based on the value of their future income. He does not like the current economy: record federal deficits, record unemployment, record low interest rates, major company bankruptcies, 20% of home owners owing more on their houses than they are worth, and the list goes on.

Given all the "record" (not typical) conditions, he can't figure out what companies are worth. The companies he is now buying may be incredibly good deals, or he could be like the last round of investors who put billions into Washington Mutual 6 months before it failed, taking all their money with it.

Predicting the economic future, beyond recognizing the impact of demographic trends (e.g., baby boomers are getting older), is not simple, if the future is different in any way from the past.

And the future always is…

How good are you at predicting what you should be paid? When you want powerful salary data and comparisons customized for your exact position or job offer, build a complete profile by taking PayScale's full salary survey.

Cheers,

Al Lee