The largest proportion of salary increase spending is on merit pay, with merit budgets representing about three-quarters of total salary increase spending.

A survey of over 400 organizations by human resource company Buck Consultants found that salary increases for 2008 will range from 3.8 percent for non-exempt employees to 4.3 percent for executives. Executives were the only employee group whose average salary increase changed from 2007 to 2008, with a slight decrease from 4.4 percent in 2007. The survey was conducted in the first half of 2007.

The largest proportion of salary increase spending is on merit pay, with merit budgets representing about three-quarters of total salary increase spending. Average planned merit increases for 2008 range from 3.1 percent for non-exempt employees to 3.6 percent for CEOs.

"Our study found that approximately three out of four organizations target non-executive base salaries at the 50th percentile of the market," said Larry Reissman, a Buck principal who directed the survey. "This indicates most employers are managing their total compensation costs very carefully, which creates challenges when rewarding their top performers."

Eighty-six percent of respondents report that they consider individual performance when determining the size of merit increases. However, Buck's survey results show that the actual effect of performance on pay increases is modest, at best. For example, employers using a five-point performance rating scale (55 percent of respondents) report that the average pay increase for the highest performance rating was 3.5 percent -- given to the top 10 percent of performers. This compares to an average pay increase of 2.8 percent for the next two performance categories -- given to three-fourths of the population.

"In our experience, organizations need to re-engineer, not just tweak, their reward programs to achieve meaningful pay for performance as well as the return on salary expenditures management expects," said Reissman.

Other key findings include:

- Sixty-two percent of respondents have a separate promotion budget. Median promotion increases range from 6.5 percent for non-exempt employees to 10 percent for executives.

- Sixty-seven percent of employers offer one or more short-term incentive plans.

- Fifty-seven percent of respondents offer hiring and/or retention bonuses. Median hiring bonuses range from five percent of base pay for non-exempt employees to 20 percent for CEOs.