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Employers expect pay freezes to end in 2010

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Employers are predicting an end of pay freezes next year, but with the rise of a 'new normal' in reward strategy cash is unlikely to be king in 2010.

The Mercer Salary Indicator (MSI) suggests the trend for companies to freeze pay is unlikely to continue in 2010 as optimism about the economic recovery gathers pace.

In the third quarter (Q3) of 2009, 76% of MSI respondents stated that their firm was not considering a pay freeze in 2010. This is a marked change from the Q1 and Q2 MSI data which showed that an immediate reaction to the downturn was to reduce or freeze salary increases. Furthermore, no organisations surveyed in Q3 are planning a promotion freeze in 2010. But respondents did highlight that, as a result of the recession, in 2010 there would be less emphasis on the cash element when rewarding staff and more on career development and elements of work/life balance.
 
Hannah Perera, a principal in Mercer's human capital business and a specialist in executive remuneration, said: "Cash, tarnished by the role of bonuses in the economic slump, is no longer king in the eyes of employers. It's being usurped by an emphasis on employee engagement and a focus on motivating specific high value employees. Whether this ‘new normal' approach continues when the economy gathers pace again remains to be seen."
 
Most organisations considered or instituted some form of salary freeze in 2009 with 22% introducing a blanket freeze and 32% applying a freeze to specific employee groups such as executives. Respondents had a more optimistic outlook for next year. Only 7% of organisations had already instituted a blanket salary freeze for this period, while 5% were considering it and 12% were considering a freeze for specific employee groups.

More than three quarters (76%) were not considering a salary freeze at all in 2010.
 
Forecasts for salary increases amongst the respondents ranged from 2.8% to 2.57% depending on employee group. There was a more positive attitude to promotions amongst the sample group with none of the respondents considering a freeze on promotions in 2010. This compares to 12% in 2009.
 
Nearly half the companies that froze pay in 2009 made special arrangements for key talent, with increases in base pay for these individuals being the most commonly cited approach (30%) followed by one-off payments (19%). In contrast, none of those companies that are making pay freezes in 2010 now anticipate making special arrangements for key talent. This may be due to severe business restraints or the result of special payments made in 2009.
 
The survey also highlighted the emerging human capital trends for 2010. Sixty-one percent of respondents said that in 2010 their company would put more emphasis on high potential employees while 56 percent of companies will put more emphasis on employee engagement. Respondents also cited a desire to put more emphasis on critical skills (44%) and career development (44%).

Over 27% of respondents believe that their reward strategy will change permanently as a result of the recession.