Variable pay raise trend hits 35-year highNews added by Benefits Pro on August 29, 2014

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By Dan Cook

The accelerating trend toward rewarding top performers with higher raises than their peers — or variable pay raises — has been clearly quantified in an Aon Hewitt survey of 2014 salary increases.

Aon Hewitt reported that variable pay spending by large corporations should hit a 35-year-high of 12.7 percent of total payroll in 2015. That’s the chunk of their salary budget that respondents forecast will go toward variable pay raises next year. Meantime, salary increases in general should move up 3 percent compared to 2014 — the highest annual increase since the 3.7 percent increase in 2008.

Aon Hewitt gathered information from 1,064 companies, and found that 91 percent of them now offer a variable pay program, compared to 78 percent in 2005. The average payroll amount carved out for variable pay raises in 2005 was 11.4 percent.

See also: Pay raises continue gradual growth

“Variable pay budgets and spending have nearly doubled in the last 20 years, subsequently emerging as the pay-for-performance vehicle of choice now and for the foreseeable future,” said Ken Abosch, compensation, strategy and market development leader at Aon Hewitt. “In a more robust job market, competition for talent exists in every sector. As a result, we are seeing industries that have traditionally shied away from providing bonuses, such as agriculture, higher-education and the federal government, realizing they must establish variable pay programs to compete for and retain the best talent.”

Abosch pointed to a major shift in attitude toward variable pay systems by American labor unions as one factor driving the trend.

“Historically unions have been resistant to performance-based reward approaches because they require management discretion,” said Abosch. “To see that variable pay spending on union employees is tracking with other hourly employees reflects a dramatic change in thinking in union leadership.”

Cities where raises will be the highest include:
  • Denver – 3.5 percent;
  • Houston – 3.4 percent; and
  • Los Angeles – 3.2 percent.
Pay raises below the average will be found in New York; Minneapolis/St. Paul, Minn.; and Milwaukee, all reporting an anticipated average increase of 2.8 percent.

The industries with the highest projected salary increases include:
  • Energy/oil/gas – 3.8 percent;
  • Real estate – 3.4 percent;
  • Telecommunications – 3.2 percent; and
  • Pharmaceutical – 3.2 percent.
Below-average raises will occur in education (2.7 percent); government (2.6 percent); and forest and paper products/packaging (2.6 percent).

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