Exempt employees at large employers can expect about the same base-pay increases in 2006 as they received in 2005, but rising healthcare and energy costs have the potential to offset salary gains, according to Hewitt Associates, a human resources services firm.

Hewitt's survey of 1,056 large organizations found that exempt employees can expect base salary increases of 3.6 percent next year--the same as Hewitt found for 2005 increases. Executive employees are projected to receive 2006 increases of 3.8 percent, compared with 3.6 percent for non-exempt employees, 3.5 percent for non-union hourly and 3.1 percent for union employees, according to Hewitt.

"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," says 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."

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, according to Hewitt. Hewitt says spending on variable pay in 2006 is projected to remain strong at 11.1 percent.

Read BLR's 2006 Pay Budget Survey Summary.