Hewitt Study Shows Base Pay Increases Flat for 2006 With Variable Pay Plans Picking Up the Slack; Health Care and Energy Cost Increases Threaten Salary Gains.

LINCOLNSHIRE, Ill. -- The good news about pay increases in 2006 is that base salary increases are not projected to be any worse than this year. The bad news is that they're not expected to be much better, and rising health care and energy costs have the potential to offset salary gains, according to Hewitt Associates (NYSE:HEW), a global human resources services firm.

Hewitt's survey of 1,056 large organizations reveals that salaried exempt employees(1) can expect base salary increases of 3.6 percent next year--exactly the same as 2005 increases. Executive employees are projected to receive 2006 increases of 3.8 percent, compared with 3.6 percent for salaried non-exempt(2), 3.5 percent for non-union hourly and 3.1 percent for union employees. Health care and energy costs are rising significantly and have the potential to eat up a greater proportion of employees' take-home pay.

"Companies are struggling to attract and retain key talent with relatively flat pay increases, while at the same time employees' pay checks are continuing to shrink due to increasing health care and energy costs," said Ken Abosch, a business leader for Hewitt Associates.

"The real challenge for companies is finding real and meaningful ways to reward their top performers without additional money in traditional base pay budgets. For many, that's going to take creativity and a heavier reliance on variable pay," Abosch added.

2006 Salary Increases by City

Hewitt's study shows that workers (salaried exempt) in some major U.S. cities should realize salary increases somewhat higher than the national average projections for 2006, including Los Angeles (4.3 percent), San Francisco (4.0 percent), Washington D.C. (3.9 percent), and Houston (3.9 percent). See attached chart for more information.

The Steady Growth of Variable Pay

For the majority of employees, variable pay--performance-related awards that must be re-earned each year--can help make up where base salary increases fall short. While base salary increases remain stable, Hewitt's survey shows increased activity in the area of variable pay, as companies rely more on bonuses as a primary means of attracting, motivating and retaining key talent.

In 2005, actual company spending on variable pay as a percentage of payroll increased to 11.4 percent, up from 9.5 percent in 2004 and exceeding 2005 projections by 1.5 percentage points. Spending on variable pay in 2006 is projected to remain strong at 11.1 percent.

Variable pay has continued to grow in prevalence since the early 1990s, with 78 percent of responding companies currently offering at least one type of broad-based variable pay plan, compared with 51 percent in 1991.

According to Hewitt's survey, business incentives(3) are the most common award (64 percent), followed by special recognition awards(4) (55 percent), individual performance awards(5) (45 percent) and non-executive stock options/ownership(6) (28 percent).

"Companies are attracted to variable pay awards because they are self-funding and only pay out if certain performance criteria are met each year, and employees appreciate the opportunity to be rewarded for meeting their goals," explained Abosch. "We've seen more plans incorporate individual performance measures into their plans this year, which helps employees focus on elements they can control in their jobs. To receive the maximum payout from variable pay plans, employees should make sure they understand their manager's expectations, get as specific as possible about measuring results, and ask for performance updates throughout the year."

Companies Struggling with Attracting and Retaining Top Performers

Given low pay increases, attraction and retention issues continue to be a sore spot for a number of companies, with 42 percent reporting problems in attracting or retaining key talent. To retain top performers, 77 percent of companies make pay equity adjustments to bring them more in line with market pay rates. In addition, companies are more often turning to flexible work arrangements (52 percent), retention bonuses (41 percent), stock awards (30 percent), part-time work options (30 percent) and a host of smaller bonuses and awards.

"Despite pay challenges, companies recognize the importance of top performing employees and are making special efforts to target this population with the goal of keeping them engaged in their work and the company, as well as appropriately rewarded," said Abosch.

About Hewitt Associates

With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 20,000 associates. For more information, please visit www.hewitt.com.

(1) Salaried Exempt: All non-executive salaried employees for whom
    overtime pay is not required by the Fair Labor Standards Act
    (FLSA).
(2) Salaried Nonexempt: Salaried employees for whom overtime pay is
    required by FLSA.
(3) Business Incentives: Awards employees for a combination of
    financial and operational performance measures for the company,
    business unit, department, plan and/or individual performance.
(4) Special Recognition: Acknowledges outstanding individual or group
    achievements with small cash awards or merchandise (e.g., gift
    certificates).
(5) Individual Performance: Rewards based on specific employee
    criteria.
(6) Stock options/ownership: Rewards stock to professionals who meet
    specific goals.