Recent survey results give employers a projection of where salaries and benefit plan designs are headed in 2010.  This article was composed based on the review of 2 recent studies.  In September 2009, the U.S. Salary Increase Budgets for 2010, was released by The Conference Board, a not-for-profit business research association.  Second, Watson Wyatt, an international consulting firm, recently published its predictions for trends in employer-sponsored healthcare plans for 2010.

Salary Increase Budgets for 2010

Information for The Conference Board report was gathered from 291 companies surveyed from April 7 through April 30, 2009.

U.S. salary increase budgets have been significantly impacted in 2009 by the weakened economy.  In 2010, budgets are forecast to be higher, but the increase is projected to be the lowest in 25 years according to the survey.

The survey defines “salary increase budget” as the pool of money that an organization dedicates to salary increases for the coming year. Generally, this figure is expressed as a percentage of current payroll.  The 2010 median forecast salary increase budget of 3.0 percent is down a half percent from 2009’s projected increase of 3.5 percent.  We believe that the increase reduced on half a percent due to the fact that overall payroll is down based on reductions in force and employers now must hold on to key workers.

Interestingly, changing market conditions throughout 2009 required companies to adjust their salary increases downward as the economy worsened.  Comparing what companies originally forecasted for their 2009 salary increase budgets and where they actually expect to finish the year is revealing. The Conference Board survey reported a full percentage point drop in the medians of the 2009 salary increase budgets in all employee categories except executive, from 3.50 percent to 2.50 percent. But it was the executive category that took the biggest hit – down 2 full percentage points (from 3.50 percent to 1.50 percent).

While the median forecast salary increase budget is low, the typical employer is still budgeting for salary increases ahead of inflation in 2010, according to the report. The Conference Board projects the inflation rate to be 2 percent in 2010.

Employer Sponsored Healthcare Benefit Trends

According to the benefits consultants at Watson Wyatt, many U.S. workers will face higher costs for their employer-sponsored health care benefits when they receive their fall open enrollment benefit packages for 2010.  Employees will also find that their 2010 employee benefit packages may include financial rewards for promoting healthy lifestyles, full coverage for preventive services, closer scrutiny of dependent and spousal coverage, and greater use of consumer-directed health plans (CDHPs).

“Faced with an uncertain economy and rising health care costs that show few signs of slowing, many employers have made changes to their health benefit plans for 2010,” said Tom Billet, Watson Wyatt senior consultant.  While next year’s benefits will reflect these higher costs, workers can also expect employers to continue their commitment to encourage employees to lead healthy lifestyles.”

Watson Wyatt has identified the following employer trends affecting employee healthcare benefits in 2010:

  • Higher out-of-pocket costs. More than 4 in 10 employers in a recent Watson Wyatt survey plan to raise deductibles, premium share and out-of-pocket maximums due to the economic crisis and the rising costs of healthcare insurance. Deductibles for individual and family coverage are expected to increase by $50 to $100 or more among many employers.
  • Greater use of healthy lifestyle incentives. Employers are continuing their push to improve the health of employees and their families. In addition to continuing the focus on wellness communication, employers are offering workers incentives such as gift cards, cash and discounted premiums for undergoing a health risk assessment or participating in smoking cessation, weight management or fitness programs. In addition, employers are providing workers access to onsite health coaching as well as using health service providers to deliver Web-based and telephonic coaching.
  • Consumer-directed health plans. More employers will offer CDHPs next year as they are increasingly viewed as an effective way to control rising costs. Those employers adopting new plans are generally adding a high-deductible plan, often with a health savings account. Most employers adding these plans will offer them as an additional plan rather than replacing existing traditional health plans.
  • Consolidation of health plan offerings. Some employers plan to reduce the number of health plan options they offer to workers. Such changes may require employees to switch physicians or face higher out-of-network charges.
  • Prescription drug benefits. As part of an overall movement to CDHPs, a number of employers are introducing a CDHP prescription drug benefit option that typically offers workers 100 percent coverage on a list of preventive medications. Other organizations will make plan modifications to include zero copays on certain prescription drug therapies that are known to help lower health costs and reduce hospitalizations.
  • Closer eye on spousal and dependent coverage. Employers are increasingly revisiting spousal and dependent coverage in their efforts to control rising costs. Some employers are beginning to require spouses to complete health risk assessments, while others are charging higher premiums for working spouses who have access to other health care coverage.
  • Reduction or elimination of retiree benefits.  Employers that offer these benefits are often reducing or eliminating the benefit.

Significance

With respect to salary adjustments in 2010, employers must strike a balance between controlling costs and retaining key employees.  Employers trying to spread a 3% salary adjustment across their entire employee population will find it hard to give meaningful increases to the average performer and higher increases to their stars. Sometimes, it is better to give no increase at all and explain the tight economic conditions the company faces rather than an insignificant adjustment that barely registers on a semi-monthly paystub.  Many employers are moving to a pay for performance model such that total pay compensation can flex based on the annual fortunes of the company.  Well crafted pay for performance plans are a clear trend among high performing employers.

On the benefit side, while the national healthcare debate continues, most employers face plan renewals in the fall and must make decisions immediately. Employers will continue to be required to think creatively when establishing group benefit designs.  The trend is to pass increasing costs down to employees.  While this may be fiscally necessary, employers should provide employees with tools to help them contain their own healthcare costs, such as exploring Health Savings Account (HSA) options.  It is important to recall that employees rank employee benefits higher in importance to wages in most major surveys.  If health cost shifting is necessary, thorough communications are necessary to avoid a negative perception of management.