Steven E. Gross, a U.S. compensation expert at New York-based William M. Mercer Consulting, has been getting lots of phone calls lately from clients at large, publicly traded companies. These addled human-resources chiefs have been consumed with one question: If they cut raises to help defray the costs of runaway hikes in health care--an unpopular trade-off they can consider only because of the lousy job market--how much will employee morale suffer?
That calculation is going on all across the business world right now. And, invariably, the answer appears to be: Go ahead, grab back what you can from employees. With job growth flat, workers have little choice but to accept what's offered. The coming squeeze is apt to be all the more painful because it comes on the heels of average raises for salaried employees of just 3.6% in 2002--the smallest hike in 25 years, according to a recent survey of 1,045 large public companies by compensation consultants Hewitt Associates. For salaried workers who aren't in hot sectors such as utilities, pharmaceuticals, and health care, pay hikes could shrink to as low as 3% in 2003--if they get any raise at all, predicts Gross.
Call it the sideways labor market, formerly known as the corporate ladder. Rather than climbing, many ambitious workers now find themselves treading water in the same jobs at much the same pay. The combination of stalled pay and spikes in health-care costs, together with decimated retirement accounts, nonexistent promotions, and battered bonuses and options, has left many workers feeling as if they are stuck, if not falling behind. "The budget is so small, you can only do so much," says Karl Fischer, vice-president for compensation and benefits at Marriott International Inc. (MAR).
Nowhere are workers getting hit harder than in their health-care costs. Next year's overall premiums--which are charged to employers, then often passed on to workers--are likely to increase an average 15%. That's on top of a 13% jump in 2002, the largest since 1990. Even worse, no relief is in sight, with experts predicting double-digit annual premium hikes for several years.
Those increases have many companies scrambling to rein in outlays. As a result, many are shifting more of the cost, risk, and responsibility for health-care coverage to employees. At Dow Chemical Co. (DOW) in Midland, Mich., an employee with family coverage will pay $118 a month next year, up 37% from this year's $86 a month.
Companies are shifting the burden to workers in more subtle ways, too. Typically, a large company picks up about 75% to 80% of the cost of the total premium. Now, many companies are lowering the amount of the premium they pay by 1% to 2% per year. In addition, many companies are asking workers to shoulder higher deductibles and payments for doctor visits. Add it all up, and for many workers, rising health-care costs will cancel out whatever small raises they pocket.
For managers who grew accustomed to the lavish pay packages of the bull market, the new reality is especially harsh. At tech companies such as Intel Corp. (INTC) and at many Wall Street firms, senior managers who made the bulk of their salary in performance bonuses during the boom have seen their pay fall by as much as 60% or more in recent years. And forget about such perks as stock options. Given the pressure to treat options as an expense, experts say companies will now be less generous with them.
What's more, pay-for-performance programs have done away with the era of across-the-board raises. Far more than in the past, companies are using their paltry salary pools to reward stars with relatively meaty raises. "Companies are aggressively managing their compensation dollars toward their best performers," says Rick Beal, a pay consultant at Washington-based Watson Wyatt Worldwide, a human-resources consulting firm. "That means some people will get zero." Still, these days, a 0% raise is a whole lot better than pounding the pavement in search of a new job. By Michelle Conlin in New York, with Michael Arndt in Chicago and Andrew Park in Dallas