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Misleading Average Salary Predictions: Your Pay Will Increase 3.6% in 2009! Wednesday, Sep 16 2009 

Misleading Average Salary Predictions: Your Pay Will Increase 3.6% in 2009!

World at Work (the compensation professional organization) released recently a compensation budget survey by Compdata Surveys. The big news: the average preliminary pay increase budget is 3.65% for 2009!

Broad averages like this drive me berserk. It is incredibly precise, but downplays the huge variations that affect individual companies and employees.

There is nothing wrong with this average per se. The problem is how it is used. Companies often use average increases like this as a starting point for deciding what pay raises they will give individual employees.

However, like pay, pay increases are determined by the interaction between the local labor market for specific jobs, individual employees’ motivations, and a company’s business plan. These microeconomic forces dramatically alter the pay increases a company will need to spend, in order to succeed, from what broad macroeconomic averages say.

Companies are free to set pay increases by these broad averages. That is a business management decision. Of course, companies are also free to fail. 🙂

Local variations are what make capitalism fun 🙂 In this post, I will look at what data is available, and what forces drive salary increases.

Are you making the most of microeconomic forces to earn what you are worth? Find out in a less than 5 minutes with the PayScale salary survey.

Your taxes at work: CBO predictions for salary increases

If all you care about is broad national averages, then the government is the place to go for predictions. Macroeconomics is the right approach for policy making; the government does a great job of finding the right data to make these broad predictions.

(PS dosnt do this)The World at Work (WatW) budget survey percentages basically give the same answers as the Congressional Budget Office’s (CBO) economic forecasts. This is not surprising; the source data for both predictions is much the same: surveys of employers about spending on employees.

The CBO’s increase for 2007 in the “employment cost index” (ECI) is 3.4%. The ECI measures the total cash compensation paid by all employers to all employees, divided by the total number of employees in the US. An increase in this index is the same as an increase in an average employee’s wage at an average company.

The WatW survey 2007 pay increase is 0.25% higher than the ECI 2007 pay increase. Since these are both predictions about the future, this difference of ~7% (0.25/3.4) is close enough for government work 🙂

If average salaries go up 3.6%, my raise should be…

What do these broad average pay increase predictions tell a particular company about how much more to pay each of its employees? Not much.

No company employs all workers in all industries. This broad average (even when broken down by industry and location) does not give much guidance to any company, not even huge employers like Wal-Mart.

To see why, let’s look at a related case where broad averages obviously do not apply to specific companies: company sales and the gross domestic product (GDP).

If broad averages applied to specific companies, every company would predict sales increases of 4.3% in 2007, because the nominal gross domestic product (GDP) is forecast to grow 4.3%. Nominal GDP measures the dollar value of all output from all companies, which is proportional to sales.

I am pretty sure the vice president for sales at PayScale has bigger plans than 4.3% growth for this year 🙂

In 2007, companies will see sales growth between -100% (go out of business), and 1000% or more (e.g., companies that release their first product). Whether the broad average increase is 2%, 3%, 4% or even 10% is not useful for predicting a particular company’s sales growth.

Sales, wages, and GDP: what is the connection?

For a company, sales and wages are obviously connected. The revenue a company earns, by selling what its employees produce, is the source of money for wages. The same holds for national averages like the ECI and GDP.

By looking at the components of nominal GDP growth, we can see both the connection to ECI, and how good the predictions are. The components are (with 2007 increases):

  • Inflation: 1.9% This is caused by more money chasing the same goods. The Federal Reserve controls the inflation rate by controlling the supply of money.
  • Population growth: 0.9% Beyond basic demographic trends, the Federal government controls population growth through immigration law and enforcement.
  • Productivity gains: 1.5% This is how much more people produce in a year, through working longer, harder, and/or smarter. This is not something the government can directly control.

The employment cost index (ECI) leaves out population growth, since it is a per employee measure. The ECI prediction is just the nominal GDP prediction minus the population growth prediction.

This difference between nominal GDP (sales) growth and ECI (wage) growth also makes sense at the company level. If a company were to double sales by hiring twice as many employees, there would be no additional money available for wages per employee.

One caveat: the ECI to nominal GDP increase relationship is only true as long as average pay is a constant fraction of average worker’s output. This average is arithmetic mean, not median: CEOs are employees, so their compensation keeps the average wage up 🙂

Predicting the future: where are the uncertainties?

The government controls inflation, so the government can predict it as well. The government has less control over population growth. However, the core demographics change slowly, and the government has some control over immigration. Population predictions a year into the future are pretty reliable.

The big question mark in future wage and GDP growth is productivity. The government has little control over this. Economists do not even know for sure the causes of the longer term trends in productivity, let alone the year to year variations. Historically, productivity increases have been all over the map.

Productivity is like the weather, what happened yesterday is a good prediction of tomorrow, except when it isn’t. 🙂 Since 1975, productivity gains have averaged ~1.5%, so 1.5% is a reasonable prediction for 2007. In reality, 0% to 3% increases are possible.

Employee productivity and company profitability

A company’s employees’ effective productivity can change dramatically from year to year. Productivity varies both in aggregate – all employees at a company work together more or less effectively – and for each employee.

Decreasing productivity shows up as falling profits for a company. Making employees productive – so they produce the most, highest value, stuff that customers then buy – is why CEOs are paid the big bucks 🙂

What we have in the salary budget survey is a precise prediction (<1%), which can be wrong by 50%, even in the broad average, for example at times of economic downturns.

Worse, the average, because it is a broad average, is not really relevant to companies and employees, because no company or employee is average.

So it goes. I guess a general prediction about the future makes people feel better than none at all. The WatW survey does have value for predicting inflation, but so do the government employment cost index and other measures.

Of course, I am not an economist, so everything in this post is wrong in the details. However, my closest friend from high school is a macroeconomist, so that makes me an expert by proxy 🙂

The PayScale Salary Calculator is a quick and easy way to compare positions. When you want powerful salary data and comparisons customized for your exact position, be sure to build a complete profile by taking PayScale’s full salary survey.

Teacher salaries raising eyebrows Sunday, Aug 16 2009 

Some ask if educators are sharing the pain

Saturday,  August 15, 2009 8:42 PM By Jim Siegel and Catherine Candisky from the Columbus Ohio Dispatch

As scores of Ohioans are seeing their paychecks frozen, cut or taken away, pressure is mounting on teachers unions and school administrators who continue enjoying healthy raises to share in the sacrifice.

 While 60 percent of schools are getting a cut in state aid over the next two years, and the rest will see annual increases of less than 1 percent, pay raises for teachers top 5 percent in some districts once all the automatic pay bumps are included.

In light of state workers and many other government-paid employees already taking concessions, such raises are getting the attention of weary taxpayers in many school districts, particularly those asking voters to approve higher taxes.

State Superintendent Deborah Delisle told The Dispatch that it’s time for “a reality check in every single community to see what we are able to sustain.”

“Communities will always look to see if sacrifice across the community is equal,” she said. “If people are feeling the pinch and they don’t see community employees feeling the pinch, there is a disconnect.”

A key fact that many taxpayers don’t realize: With all their pay increases for experience or academic training, most Ohio teachers would get a raise even if they took a contractual salary freeze.

In Worthington, where the district is headed to the ballot again in November, John Herrington and his organization, Educate Worthington, are helping lead a growing debate about not only whether teachers should take pay concessions in the short term, but if the district’s salary structure is sustainable in the future.

It is not, Herrington argues.  “People deserve raises, but they should be more in line with what the community is making,” he said, noting that potential cuts proposed by the school board if the levy fails do not include salaries.

“You see very little dealing with the adults in the situation. It hits the kids.”

Some school employees already have taken action. South-Western administrators and teachers are taking no base pay increases, nor are those in Groveport Madison, Grandview Heights and Canal Winchester, which has the lowest pay scale in Franklin County.

Canal Winchester Superintendent Kim Miller-Smith said wages were frozen last spring just weeks before the district asked voters for the fifth time to approve a tax hike.

“How could any of us take raises when we were going to have to lay off 27 people?” she said.

“It was a show of cooperation among everybody that we need to take care of funding our schools first and then we can come back and deal with contracts.”

The levy passed.

Like the state superintendent, Gov. Ted Strickland does not want to interfere with local contract negotiations but agrees that cutbacks must be shared.

“I think it’s appropriate for all of us to participate in sacrifices that will get us through these times,” he said.

Teachers unions say times are tough for everyone, including educators.

“Teachers are not getting pay raises, and some districts delayed negotiations pending the outcome of the state budget,” said William Leibensperger, vice president of the Ohio Education Association.

He cautioned against short-changing teachers.

“There is an undeniable correlation between teacher salaries and resources given to teachers and student achievement,” he said.

Westerville school leaders have been hearing calls for concessions as they prepare to ask for an additional 7.97 mills in November. Administrators already have agreed to a pay freeze, and contract negotiations with teachers are ongoing.

“(Administrators) stepped up to the plate, and we hope the teachers will follow,” said Westerville Assistant Superintendent Christopher Wanner. “With what is going on with the economy and what people have been through, I think it’s very difficult to look at any sizable increase.”

A Dispatch analysis of contracts last school year found that raises for teachers in nearly every Franklin County district would average 5.9 percent to 8.8 percent per year over their first 10 years on the job, thanks to automatic step increases and base salary hikes.

New teachers in Bexley, Dublin, Gahanna-Jefferson, Grandview Heights, Hamilton, Hilliard and Worthington could double their salaries in about 10 years.

Worthington teachers get automatic step increases for experience in 20 of their first 29 years of employment, at 1 to 5 percent each, plus another six pay bumps as they work toward a master’s degree and beyond (Ohio requires teachers to have a master’s degree by the end of their 12th year). So the 2.85 percent increase in the contract actually averages about 5 percent per teacher.

Meanwhile, the average wage and salary increase for nongovernment employees in the 12-month period ending in June was 1.8 percent, according to the U.S. Bureau of Labor Statistics. Raises in 2010 are not expected to top 2 percent, according to federal estimates.

Thomas Ash of the Buckeye Association of School Administrators said step increases help districts retain their best and most experienced teachers. But he sees no logic in the fact that most contracts provide pay steps for the first 11 years or more.

“Is somebody going to tell me that a teacher is better after 11 years than a teacher was after five? I’ve never seen any research to prove that,” he said.

In Worthington and many other districts, it is doubtful that districts can sustain significant pay raises.

State funding for daily school operations was cut by 0.24 percent for both this year and next. There is little hope that things will improve in the state budget two years from now without another federal stimulus package or significant tax increase.

“To commit yourself to a new contract with increases, basically you are committing yourself to a local tax increase, because money is not coming from the state to cover that,” said Sen. Gary Cates, R-West Chester, who heads the Senate Education Committee. “School boards run a great risk of alienating the public if they continue to give out salary and benefit increases in these times.”

David Bressman, president of the Worthington Board of Education, said if teachers agreed to give back their raises, as administrators already have done, it would help pass an incremental levy in November. Voters in May crushed a larger 7.4-mill issue by 18 percentage points.

“A lot of folks who are on the fence have told me either privately or publicly, that if they see some action by the teachers and the administrators they would be strongly inclined to support the November levy,” he said.