THE KEYSTONE COMPASS
A Research Report and Insights Published by
Keystone Compensation Group LLC
Current Economic Trends and Their Impact on
Compensation and Benefit Programs
Fall 2013
www.keystonecomp.net | Ph. 612.810.3522 | [email protected]
EXECUTIVE SUMMARY
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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
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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KEY MACRO ENVIRONMENT INDICATORS
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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.
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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THE NATIONAL ECONOMIC ENVIRONMENT*
Historical Trends of U.S. Unemployment, Salary Budget, Salary Structure & Inflation
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P
e
r
c
e
n
t
Inflation Rate
Unemployment Rate
Salary Structure Adj.
Salary Budget
9
7
5
3
C
h
a 1
n
g -1
e
-3
2006
2007
2008
2009
2010
Year
2011
2012
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
* Source: Bureau of Economic Analysis, Bureau of Labor Statistics, WorldatWork, Federal Reserve Board
2013
2014
2015
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THE NATIONAL ECONOMIC ENVIRONMENT*
Historical Trends of U.S. Unemployment, Inflation, and Gross Domestic Products
11.0
P
e
r
c
e
n
t
10.0
C
h
a
n
g
e
5.0
Inflation Rate
Unemployment Rate
Real GDP
9.0
8.0
7.0
6.0
4.0
3.0
2.0
1.0
2009
2010
2011
2012
Year
2013
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
* Source: Bureau of Economic Analysis, Bureau of Labor Statistics, WorldatWork, Federal Reserve Board
2014
2015
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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
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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%
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
6
DIFFERENTIATION AND PERFORMANCE-BASED COMPENSATION
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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.
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
7
HEALTHCARE COSTS TRENDS AND PROJECTIONS
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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.
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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TREND OF HEALTHCARE COSTS INCREASE OVER TIME *
8.0%
7.6%
7.4%
7.8%
7.3%
7.0%
6.9%
6.0%
6.3%
6.5% (P)
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2008
2009
2010
2011
2012
2013
2014
* Source: Milliman Medical Index & PWC Health Research Institute (May 2013)
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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TREND OF HEALTHCARE COST INCREASE IN DOLLARS (FAMILY OF FOUR)*
$25,000
$20,000
$15,609
$16,771
$18,074
$19,393
$22,030
$20,728
$23,462 (P)
$15,000
$10,000
$5,000
$0
2008
2009
2010
2011
2012
2013
2014
* Source: Milliman Medical Index & PWC Health Research Institute (May 2013)
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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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.
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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KEY OBSERVATIONS AND RECAP
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The current economic expansion as measured by Gross Domestic Products
(GDP) remains slow, but enough to add new jobs and reduce jobless rate.
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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%.
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Very few organizations are freezing their salary budgets (4%) in 2013 as
declining unemployment rate pressures employers to raise salaries.
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Organizations should base their salary increase budget on business conditions
and align it with their overall compensation strategy.
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Performance-based pay can play a key role in balancing pay and productivity.
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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.
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.
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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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
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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KEYSTONE COMPENSATION GROUP CAPABILITIES
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Compensation program strategy development
Base pay program design and implementation
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Short- and long-term incentive programs development and design
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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
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Competitive market analysis
Salary structures design
Salary administration guidelines
Competitive market analysis
Pay mix between cash and equity/long-term to alight with strategy
Compensation surveys
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Capabilities to conduct major compensation surveys online
Conduct custom compensation surveys based on client requirements
Keystone Compensation Group LLC| www.keystonecomp.net | Ph. 612.810.3522
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