Just when many U.S. employees were starting to see fatter paychecks, the pay party could be ending.

Judging from annual fall surveys of pay budgets at major U.S. firms, salaried employees should fare well next year, compensation consultants say. Basic wage increases of about 4.1 percent to 4.4 percent would continue a recent trend to higher real wages -- pay increases minus inflation -- after years of relative wage stagnation.

But the world economic climate has worsened in recent months. In the past several weeks, large employers such as Halliburton Co., Raytheon Co. and Atlantic Richfield Co. have announced layoffs. If conditions continue to deteriorate, all bets could be off.

Manufacturing wages have been affected as the world economy slows, said John Duca, senior economist at the Federal Reserve Bank of Dallas. So has pay at financial firms such as brokerages and banks, which have been hit by the recent stock market turmoil.

But a tight labor market continues to prop up wages in many service industries.

"What we're seeing here is a tale of three economies," Duca said.

Surveys by leading compensation consultants show midsize to large firms plan 1999 merit raises for salaried employees that range from 4.1 percent to 4.4 percent. With inflation at a 1.4 percent annual rate, that's a nice spread, even if prices start rising at 2 percent or 2.5 percent next year, as economists predict.

Hewitt Associates' survey of 1,069 firms showed next year's budgeted raises for salaried employees averaging 4.2 percent, up from 4.1 percent this year. The American Compensation Association polled 2,776 U.S. firms and 176 Canadian companies for a 1999 projection of 4.4 percent. Buck Consultants put the 1999 figure lower and even with the previous year, at 4.1 percent. Watson Wyatt Worldwide's surveyed companies also are budgeting 4.1 percent merit raises for '99.

That's a sharp contrast with 1996, when budgeted increases tracked by Hewitt hit a 10-year low of 3.9 percent for salaried exempt employees. With inflation about 3 percent, that left a slim real gain.

Executives are getting the largest increases, while nonunion hourly workers would fare the worst. Hewitt's survey puts broad increases at 3.9 percent for nonunion hourly employees and 4.4 percent for executives.

A strong upward trend in raises began this year, when companies overspent budgets to lure scarce talent, said Ken Abosch, a compensation expert at Hewitt, a national consulting firm based in Lincolnshire, Ill.

"Historically, salary increase numbers tended to lag what was happening with inflation," he said. "What makes these numbers so startling is that inflation hasn't been on the increase. Inflation has been flat.

"For the first time in a decade, something else is happening. That something else in this case is a tight labor supply," Abosch said.

Consultants' surveys are limited to the relatively large companies they poll. But the federal government's Employment Cost Index, a broad measure of increases in wage and benefit costs, showed the same trend. Wage and benefit costs for all civilian employees were 3.5 percent higher in June than 12 months earlier, the biggest percentage increase in the index since 1993.

Given low inflation and rising wages, this year saw "the biggest spread we've had in 10 years," said Bob Diers, a senior compensation consultant for William M. Mercer Inc. The slightly higher raises budgeted for next year don't look as good in real terms because of expected increases in consumer prices.

With a worsening economy, will employers pull back on those planned increases? Abosch of Hewitt doesn't think so. Many firms had taken a softer business climate into account, he said.

"If the economy continues its downward spiral in an environment of scarcity and tight labor supply, they [employers] will be forced to stay with numbers like these in order to attract and keep employees they need," Abosch said.

But Diers at William Mercer isn't as sure. "Companies may want to examine and retrench a bit," he said, meaning planned salary increases could be scaled back.

Whatever happens to budgeted raises, they're not the whole pay story.

Pay has begun to vary more within job categories, as employers pay top dollar for specific skills, said Bruce Mamary, a principal in the Dallas office of Buck Consultants. This year, "information systems were getting huge increases compared with everyone else," he said.

More widespread use of incentive pay -- from performance bonuses to profit-sharing and stock options -- also has put dollars in employees' pockets.

'Tendency to lay off workers'

Such flexible plans are the first place employees will take a hit as the economy sours, experts said.

"The payoffs in the variable pay plans won't be in the area of 10 percent. They'll be zero, or they'll be 5 percent," said Wallace J. Nichols, the executive director of the American Compensation Association.

"But I think what will also happen is not that pay will be cut but there will be more of a tendency to lay off workers," Nichols said. During tough economic times, it's not unusual for companies to lay off workers while continuing to grant small raises to those who remain on the payroll.

There are plenty of employers hanging the "help wanted" signs and ratcheting up pay to lure and retain scarce talent.

Consider the Cheesecake Factory, a California-based restaurant-bakery chain advertising in trade magazines for general managers and executive kitchen managers. In ads for these posts, the company promises base pay and a performance bonus plus a results-based "golden handcuff" of cash and stock options, payable after five years' tenure.

Restaurant general managers also get a leased BMW 328i, said Bill Streitberger, Cheesecake Factory's vice president of recruiting.

'Remain competitive'

In a different service industry, Dallas-based Southwest Airlines Co. also expects to pay above market next year, said Ralph Kimmich, director of benefits and compensation.

"We want to try to remain competitive," he said.

For this year, Southwest had budgeted salary increases for nonunion personnel at 4.5 percent, later raising them to 5 percent because of improved financial results, Kimmich said.

"I'd say for the current year, we'll be proposing 4.5 to 5 percent, depending on our financial results," Kimmich said.

At Standard & Poor's Data Resources International, senior economist Cynthia Latta sees a continuing tight labor market for six months, with "some gradual easing next year. But we are going to see over the next few years a significant tightening of the labor force, which will help keep the unemployment rate below 5.5 percent for the next few years."

Pub Date: 10/26/98