In the midst of a slumping national economy, ever-increasing gas prices, and a looming election, “uncertain” is perhaps an understatement for the way many companies feel about creating their budgets for the year ahead. Just as unsure are their employees, many of whom are preparing for year-end reviews and wondering how current economic conditions will affect planned wage adjustments and/or merit increases.

Despite doom and gloom forecasts, however, recent research uncovers some interesting trends for employee wages in 2009.

Employees nervously awaiting news of budget cuts and cancelled raises can breathe a (temporary) sigh of relief. Several recent surveys by leading research firms all point to the same conclusion: despite the economic slowdown, U.S. employers on the whole plan to keep wage increases steady for 2009. A survey by Watson Wyatt Worldwide revealed that employers plan to give workers pay raises averaging 3.5 percent during 2009. Likewise, WorldatWork's annual Salary Budget Survey predicted an average 3.9 percent planned increase in salary budgets, and Business and Legal Reports 2009 Annual Pay Budget Survey indicated an overall 3.71 percent planned merit increase for the coming year.

Employees should not expect pay raises to be distributed evenly across the board, however. Performance still plays a key role in determining employee rewards. Findings in all three surveys indicated that while most employees can anticipate a wage increase for 2009, those found to be performing exceptionally well can expect a much higher increase (between 4.4 and 6 percent), while employees performing below expectations will likely receive an increase of 2 percent or less.

Overall, the findings of these surveys seem to indicate that in spite of the economic slowdown, the labor market is relatively stable. Watson Wyatt Worldwide even hints that these planned wage increases may function as a form of economic stimulus. According to the company's global director of strategic rewards consulting Laura Sejen, while “the economy is no doubt taking its toll on workers, their 2009 merit increases appear safe – at least for now. Employees will view holding merit increase budgets steady as a positive sign that will help them offset inflation and higher energy and food costs.”

Companies developing budgets for the year ahead must pay close attention to these forecasts, and then assess whether or not they run the risk of losing key employees by failing to provide pay increases in line with those of their competitors. Companies who do not plan to keep up with the average pay increase may need to examine alternative means of rewarding employees in order to maintain a competitive workplace and ensure employee productivity and retention.

According to Anne Ruddy, president of World at Work, “pay increases are only one way an organization attracts and retains talent regardless of the overall economy. Organizations continually evaluate the attractiveness of their entire rewards package and develop new programs accordingly. They are investing in other areas of total rewards, such as employee development, training, and work-life balance.” Such alternative rewards may include additional vacation time, telecommuting options, or increased medical and dental benefits.

While most companies appear to be building increased wages into their budgets for 2009, many must also develop contingency plans in order to withstand the possibility of further economic decline. For many organizations, layoffs and hiring and/or salary freezes are among the top contingency activities in place, according to Watson Wyatt. As companies evaluate their organizational staffing structures, they may face the troubling predicament of finding a way to lower overhead costs through layoffs while minimizing the effects these activities will have on production efficiency.

For employers facing layoffs and hiring freezes, utilizing contractor services through an employer of record may provide a cost-effective solution for maintaining productivity. Employers in the midst of a hiring freeze but in need of additional staff can hire contract workers through an employer of record service, minimizing the hidden costs of in-house hiring, workers compensation, payroll taxes, and insurances. When freezes are lifted, employers can then bring these contract employees on staff full time, or may choose to end the assignment without the risk of paying high unemployment costs.