THE KEYSTONE COMPASS · •Performance-based pay can play a key role in balancing pay and...

Current Economic Trends and Their Impact on

Compensation and Benefit Programs

Fall 2013

THE KEYSTONE COMPASS

www.keystonecomp.net | Ph. 612.810.3522 | [email protected]

A Research Report and Insights Published by

Keystone Compensation Group LLC

Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522

EXECUTIVE SUMMARY

• Slow but steady economic growth (GDP) has contributed to lowering the unemployment rate to 7.3% in August 2013

• Minnesota jobless rate is 10th lowest in the nation at 5.2%

• Voluntary turnover reached 10% in 2012

• 40% of employers reported difficulty retaining critical-skill employees in 2012

• Percentage of employers freezing their salaries declined to 4% in 2013 down from over 30% in 2009

• Salary budgets continue to recover from an all-time low of 1.8% in 2008 and projected to reach 3.0% in 2014

• Differentiation of pay based on performance would be a key strategy to retain top talent with a small merit budget

• Health care costs increase continues to erode the value of base salary increases granted to employees

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KEY MACRO ENVIRONMENT INDICATORS

• The improving picture of employment drove the equity market to an all-time high in the summer of 2013. The financial markets recovered all the losses it suffered during the great recession.

• The real gross domestic product, defined as the output of goods and services produced by labor and property, increased at the rate of 2.5% in the 2nd quarter of 2013.

• The annualized Consumer Price Index was 2.0% in July of 2013, down from 3.6% in 2011.

• The official jobless rate has been steadily declining from its 10% peak in October 2009 to 7.3% in August of 2013.

• Minnesota unemployment rate was 5.2% in July making it the 10th lowest state in the nation with Nevada being the highest at 9.5%.

• Salary increase budgets are expected to increase to 3.1% in 2014 up from an all-time low of 1.8% in 2008.

• Voluntary turnover is on the rise reaching 9.8% in 2012. The general turnover rate varies by industry and was about 15% the same year.

• Competition for talent is increasing with over 40% of employers reported having difficulty retaining critical-skill employees in 2012.

• The percentage of employers freezing their salaries in 2013 is projected to continue its decline to around 4% down from about 6% in 2012. This is near pre-recession level.

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THE NATIONAL ECONOMIC ENVIRONMENT*

-3

-1

1

3

5

7

9

11

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

P

e

r

c

e

n

t

C

h

a

n

g

e

Year

Historical Trends of U.S. Unemployment, Salary Budget, Salary Structure & Inflation

Inflation Rate Unemployment Rate Salary Structure Adj. Salary Budget

* Source: Bureau of Economic Analysis, Bureau of Labor Statistics, WorldatWork, Federal Reserve Board

4


THE NATIONAL ECONOMIC ENVIRONMENT*

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2009 2010 2011 2012 2013 2014 2015

P

e

r

c

e

n

t

C

h

a

n

g

e

Year

Historical Trends of U.S. Unemployment, Inflation, and Gross Domestic Products

Inflation Rate Unemployment Rate Real GDP

* Source: Bureau of Economic Analysis, Bureau of Labor Statistics, WorldatWork, Federal Reserve Board

5


SALARY STRUCTURE AND BUDGET INCREASES FOR 2013 AND 2014

• The median national salary structure adjustment was 2.0% in 2013 for all employee groups and is expected to stay the same in 2014. About 13% of employers are not planning to adjust their salary structures in 2014 compared to 24% in 2013.

• Average total salary budget was 2.9% in 2013 for all industries in the U.S. and is projected to increase slightly to an average of 3.1% in 2014.

• The average merit budget was 2.7% in 2013 and is expected to be around 2.8% in 2014.

• Trends of average total increases by industry/company size:

Industry 2010 2011 2012 2013 2014 P

Financial and Insurance 2.7% 2.8% 2.8% 3.0% 3.0%

Healthcare Systems 2.4% 2.7% 2.7% 2.8% 2.7%

Manufacturing 2.6% 3.0% 2.9% 3.1% 3.1%

Retail 2.6% 2.8% 2.8% 2.8% 3.0%

Public Sector 1.3% 1.3% 1.7% 2.1% 2.6%

Construction 2.0% 2.5% 2.6% 2.7% 3.3%

Non-profit (national) 2.7% 2.8% 3.0% 3.0% 3.1%

Minnesota (all industries) 2.5% 2.7% 2.9% 3.0% 3.1%

Small Co. ($30-$100 mm) 2.5% 2.7% 3.1% 3.1% 3.2%

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DIFFERENTIATION AND PERFORMANCE-BASED COMPENSATION

• Salary increases for high performers (21% of total employees) averaged 4.1% in 2013 compared to 2.7% for solid performers (70% of employees) and zero for low performers.

• Over the past several years, the merit increases that high performers received have been around 150% of the amount granted to middle performers.

• The small merit budget combined with the need to retain high performers are pressuring employers to differentiate pay based on performance.

• 83% of employers use some form of variable pay to recognize key contributors up from 79% in 2011. At the same time, employers are setting harder goals for paying target incentives.

• The median of variable pay budgeted as a percent of payroll is expected to remain unchanged from 2013 to 2014:

• 5.0% of base pay for nonexempt level employees

• 12.0% for exempt level employees, and

• 35.0% for executives

• On average, employers budgeted 1.0% of total base pay for promotional increases

• The median promotion increase was 8.0% in 2012.

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HEALTHCARE COSTS TRENDS AND PROJECTIONS

• Healthcare costs went up 6.3% in 2013 over 2012. Employer’s portion increased 6.1% and employee portion increased by 6.5%.

• For 2013, employee’s share of the total healthcare costs was 42% while employer share was 58%. More employers are passing cost increases to employees.

• The typical healthcare costs for a family of four reached $22,030 total in 2013. These costs were allocated as follows:

● 16% employee out-of-pocket (co-pay, deductibles)

● 25% employee contributions (payroll deductions)

● 58% employer contributions

• Employee’s combined contributions reached $9,144 in 2013 compared to $12,886 for employers.

• Healthcare costs are projected to increase by 6.5% in 2014 and could reach a total of $23,462 for a typical family of four.

• The projected increase in healthcare costs of 6.5% for 2014 is about 2.5x the projected GDP growth and presents a major challenge for our economy.

8


TREND OF HEALTHCARE COSTS INCREASE OVER TIME *

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

20082009

20102011

20122013

2014

7.6% 7.4%

7.8%

7.3%

6.9%

6.3% 6.5% (P)

* Source: Milliman Medical Index & PWC Health Research Institute (May 2013)

9


TREND OF HEALTHCARE COST INCREASE IN DOLLARS (FAMILY OF FOUR)*

$0

$5,000

$10,000

$15,000

$20,000

$25,000

20082009

20102011

20122013

2014

$15,609 $16,771 $18,074 $19,393

$20,728 $22,030 $23,462 (P)

* Source: Milliman Medical Index & PWC Health Research Institute (May 2013)

10


PATIENT PROTECTION AND AFFORDABLE CARE ACT (ACA)

• Immediate impact in 2014 focused primarily on individuals and small employers

• ACA is likely to have low impact on the healthcare cost for families insured by large

group health plans

• It is unclear how the reforms will affect the premium rates or the growth in the cost of

healthcare services for individuals over time

• New reforms will add new taxes and fees for individual and group insurance

• For currently insured individuals and small groups, costs may increase or decrease as

new participants are added to the pool.

• As the number of uninsured patients declines, there could be a reduction in shifting of

the cost of the uninsured to insured patients.

• One important effect of ACA is improved transparency around pricing of services

which could lead to slowing growth of healthcare costs.

• Transparency around pricing of services could also help patients become more savvy

consumers and improve the fairness of the system to individual consumers who are

not eligible for discounted group rates.

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KEY OBSERVATIONS AND RECAP

• The current economic expansion as measured by Gross Domestic Products

(GDP) remains slow, but enough to add new jobs and reduce jobless rate.

• The total salary increase budget for 2014 is projected at 3.0-3.1% while the

salary structure adjustments are projected to be 2.0%.

• Very few organizations are freezing their salary budgets (4%) in 2013 as

declining unemployment rate pressures employers to raise salaries.

• Organizations should base their salary increase budget on business conditions

and align it with their overall compensation strategy.

• Performance-based pay can play a key role in balancing pay and productivity.

• Healthcare costs increased by 6.3% in 2013 and are projected to go up 6.5% in

2014. Employers should pay attention to the net effect of healthcare cost

increase and the small merit budget on employees’ salaries and talent retention.

• For the near term, it appears that the effect of the healthcare reforms on total

healthcare cost growth is unknown, other than increased taxes and fees.

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RESEARCH SOURCES

1. 2013-2014 WorldatWork Salary Planning Survey

2. 2012-2013 Global Talent Management Study, Towers Watson, December 2012

3. 2012 – 2013 PwC’s Global Talent Management and Rewards Study

4. 2013 PwC’s Health and Well-being Touchtone Survey

5. Bureau of Labor Statistics (BLS) report July 2013

6. Federal Reserve Bank Summary of Economic Projections, June 2013

7. Milliman Medical Index, May 2013

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KEYSTONE COMPENSATION GROUP CAPABILITIES

Compensation program strategy development

Base pay program design and implementation

Competitive market analysis

Salary structures design

Salary administration guidelines

Short- and long-term incentive programs development and design

Define key business objectives and measurements

Assist with developing performance standards and linking them to incentive pay out

Program documentation and communications

Executive and Board of Directors Compensation

Competitive market analysis

Pay mix between cash and equity/long-term to alight with strategy

Compensation surveys

Capabilities to conduct major compensation surveys online

Conduct custom compensation surveys based on client requirements

14

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