Another Year, Another 3%

2020 will be the ninth year in a row of 3% average raises, according to new Korn Ferry data. How will employees react?

By now, everyone in the organization is probably used to hearing it. And they can expect to hear it again in 2020. Average raises to base salaries for US employees will likely be about 3% percent next year, the ninth consecutive year of 3% raises.

That 3% annual increase has remained steady even though the economy, over the last nine years, has grown steadily and unemployment has fallen to levels not seen since the 1960s. But looking forward, leaders seem to be concerned that the good times won’t last. “There are mixed views on anticipated economic growth, which has an impact on wage growth,” says Tom McMullen, a senior client partner at Korn Ferry. “Feelings of uncertainty about the future are keeping employers cautious in terms of offering higher growth in fixed costs and base wages.”

The forecast is based on a survey of human resources professionals in organizations large and small across the United States. The results were then compared to figures in Korn Ferry’s pay database, which stores pay information on more than 20 million employees across the world.

To be sure, this latest forecast comes amid signs that the economy is weakening, at least in some sectors. US manufacturing has been stagnating for months, despite the solid job market, and the number of new jobs created each month has been declining slightly since the middle of 2018.

Still, profits have been robust. The operating profit margin of the S&P 500 has gone from a little more than 8% in 2010 to nearly 12% now, according to data from the investment analysis firm Yardeni Research. Instead of using the cash generated from their expanding businesses to finance across-the-board raises, many organizations have been using it to expand profitability, says Bob Wesselkamper, Korn Ferry’s global head of rewards and benefits.

The picture is a little better for high achievers. Highly rated talent could get double the base pay increases of average-rated talent, depending on the organization, McMullen says. In addition, many companies are relying more on their short- and long-term incentive plans or pay-for-performance programs to reward their top performers, rather than increasing base pay.

And yet if employees grow frustrated with their pay, they may look to leave, and the cost to replace them may dwarf a salary increase of an extra percentage point or two. The Center for Accountability and Performance found that the average cost to fill a high-turnover, low-paying job (less than $30,000 a year) is 16% of the salary; for midrange roles it’s 20%; and for executives it’s 213%. That’s $3,000 to replace a $10-per-hour retail employee and more than $200,000 to replace a $100,000-per-year executive.

Experts say if an organization won’t raise pay then it must give employees other reasons to stay. That can take a variety of forms, from focusing on benefits and quality-of-life factors—such as maternity or paternity leave programs or flexible paid time off—to helping employees advance in their careers, and leading with mission and purpose.

Another key is for senior leaders to empower lower-level managers with tools that can help keep employees, says Melissa Swift, a Korn Ferry senior client partner in the firm’s Digital Solutions practice.

When an employee tells their boss that they have a competing, higher-paying job offer, those bosses may only know that they can’t match the salary. But if the boss can offer other incentives, such as leadership development training or project management certification, the chances that the employee will stay increase. “For individual managers, they need that tool kit,” Swift says.