Will your employees get a raise in 2019? Quite possibly - but even with unemployment at historic lows and the war for talent intensifying, most companies' salary increases remain at the standard 3% level. This phenomenon has puzzled economists for a long time.

"We are still surprised that employers have not adjusted their compensation budgets," Mary Ann Sardone, a partner at Mercer and leader of its North American compensation practice, told HR Dive. She noted that despite persistent tight market signals, corporate budgets have not loosened accordingly.

Salary growth projections for 2019 remain concentrated in the 2.8% to 3% range. Willis Towers Watson's forecast is slightly more optimistic, expecting an increase of 3.1%, but few reports indicate significant changes. U.S. Bureau of Labor Statistics (BLS) data shows total compensation growing year-over-year, but this includes benefit spending - and benefit costs have risen steadily in recent years.

The economy has been stable for years, and the labor market continues to tighten, but a large-scale market response has not materialized. What exactly is the problem?

The reality: wage increases only keep pace with prices

Recent optimism has led some to predict wages are finally about to rise - but frankly, the statistics still do not support this. Sardone said that while wages are indeed slowly climbing, the increases only match consumer prices, and employees may not feel an improvement in actual purchasing power. A recent Aon survey found that employees' total income opportunity - the potential sum of salary and variable pay - has actually declined over the past three years.

This phenomenon creates an interesting decision-making environment for employers, but the specific impact largely depends on geographic location, industry, and employer size. Sandra McLellan, North American compensation practice director at Willis Towers Watson, told HR Dive via email that some companies are directing investments toward "hot" skill areas, such as technology talent. "They are also looking at introducing or adjusting annual bonuses or incentive plans to focus cash rewards on top performers," she added.

Tim Gates, senior regional vice president at Adecco, told HR Dive that small and medium-sized enterprises are raising salaries more quickly, partly because it is "easier to review case by case" when the organization is smaller. A large organization with 1,000 employees in the same role, however, would face a "significant impact" if it raised salaries uniformly.

Gates noted that this impact touches on the real concern behind employers' resistance to significant raises: "If we react too quickly and the market loosens, will we suddenly be overpaying?" Economic uncertainty and a volatile political environment have heightened employer anxiety, Sardone said, and many companies are reluctant to significantly adjust fixed costs in response to these variables.

Globalization and the gig economy: reshaping the workforce landscape

What is another major reason U.S. labor budgets have remained largely unchanged? Employers are more willing to look outside traditional frameworks for workers - whether overseas talent or gig labor. The unprecedented globalization of business has changed how employers envision their talent pools.

"People can almost be hired and work anywhere," Sardone said. "So when we look at the U.S. labor market, it is defined by U.S. borders. But more and more companies are looking for talent pools elsewhere in the world, so increasing budgets domestically may not make much sense." Workers with similar skills outside the U.S. may command lower wages, which is favorable for employers. Although "outsourcing" talent still carries some negative connotations, it has become a key part of how businesses and clients operate, and acceptance has broadened significantly, Sardone said: "It is a reality."

The continued growth of the gig economy may also have long-term effects on wages. "It has a big impact," Gates said of the gig economy. "Without long-term goals, the primary way to attract these individuals ultimately comes down to wages." Wages are at least usually the starting point for contract worker negotiations - but the budget logic behind them is completely different from that for regular employees. Employers are accustomed to having a stable traditional workforce, but as vacancies arise, some are beginning to rethink whether positions must be full-time, Sardone said, which undoubtedly adds to the hesitation to raise salaries for regular employees.

Job switchers: the winners in compensation negotiations

Employees have become aware of the salary status quo and are increasingly willing to switch jobs for higher pay, as multiple reports have confirmed. "Many organizations are fearful of this," Sardone said. "It is happening to them. But perhaps our future workforce is meant to take different forms." Acceptance of some talent attrition has become more common, especially as the market remains active. But this situation also pressures employers to improve their retention capabilities.

"Organizations must be very smart about planning what they offer," Gates said. "You cannot stop recruiting talent; you must retain them." Talented employees will have a wealth of options and opportunities, and if compensation is not a lever the organization can pull, it may need to find other ways. Employers must be clear about their needs and remain active in the market, Gates said, and any company caught off guard by job switching will struggle in the market.

"What they need to do is better simulate the experience employees get externally," McLellan said. For example, social networks can provide employees with opportunities to discover internal positions and allow employers to reconsider how compensation budgets are allocated to better reward such career development. "The pressure on employers to do this well will only increase."

The evolution of total compensation: balancing benefits and cash

A perceived lack of compensation flexibility has led some organizations to adjust their total compensation packages to encourage productivity. For example, Gates mentioned that some organizations allow employees to leave early after completing quotas but still pay them for the full shift. Employers are increasingly willing to offer novel and attractive benefits to better meet employee needs, including lactation benefits and development programs. But companies must be careful not to put all their chips in one basket and should focus on benefits that truly serve their employee base.

"If benefits are used as a substitute for pay, their effectiveness is greatly diminished," Sardone said. "Having these benefits is nice, but if you are not paying enough, it will not work." However, this trade-off is more or less a reality. Pressure for pay equity has forced employers to rethink annual raise approaches, leaving little room in base salaries for pay-for-performance, Sardone added. Aon's survey also supports this conclusion: variable pay as a percentage of spending fell from 12.7% in 2017 to 12.5% this year, and is expected to drop further to 12.1% next year.

Striking a delicate balance between compensation and benefits may be a familiar struggle. Employees continuously weigh work experience against pay, and employers offering efficient, healthy cultures carry weight in the current market. "This overall experience is the complete story of why employees join and stay with a company," McLellan said. "Perfecting this experience may take effort, but ultimately, employers compete on the overall experience they provide to employees."