updated 7/14/2004 9:01:01 AM ET 2004-07-14T13:01:01

Despite an improved economy, cost-conscious employers are granting workers limited pay raises this year, and plan only slightly larger increases in 2005.

Companies are budgeting pay increases of 3.3 percent to 3.5 percent this year _ the third in a row below the 4 percent-plus level that was routine in the 1990s _ and plan raises of 3.5 percent next year, according to a pair of surveys.

The modest raises both this year and next will keep workers' pay increasing faster than the rate of inflation. But higher worker contributions for health care could eat up much of the pay gains, analysts said.

Employers have seen business conditions improve. But in a labor market that still favors companies, employers are wary of taking on the largely permanent costs of big pay raises, said a survey to be released Wednesday by Mercer Human Resource Consulting.

That dynamic is unlikely to change much in the next few years, concludes the Mercer survey and another issued last month by the Conference Board.

"There's been a change in the deal, so to speak, between employees and employers ... and I don't see anything on the horizon to ease that up," said Steven Gross, a compensation consultant for Mercer.

Managers at many companies feel the tight labor market of the late 1990s forced them into issuing larger raises then they intended. Many companies have broadened incentive plans that reward workers with one-time bonuses for good performance, without locking themselves into large pay increases.

"What it comes down to is companies are being very, very cost conscious," said Charles Peck, compensation specialist with the Conference Board. "Companies are being very cautious about incurring fixed expenses."

For workers, the most encouraging news may be that the days of widespread pay freezes appear to be over.

About 5 percent of companies are freezing pay for at least some of their workers this year, down from 12 percent last year and 16 percent in 2002, the Mercer survey found.

Inflation estimates for this year and next vary. But the pay increases employers are planning this year will outpace inflation by about 1 percent. That is at the low end of the 1 percent to 1.5 percent-above inflation that employers often use to budget for pay increases.

The Conference Board's Peck said increases in that range should make workers feel "satisfied, but not ecstatic."

The pay raises employers are giving this year are at or slightly lower than what they forecast when asked about their plans last year.

Employers' plans to stick with raises below 4 percent keeps pay increasing at its slowest rate since at least the mid-1970s. But the limited increases have coincided with very low inflation.

Employers increased pay about 5 percent each year in the early 1990s, then trimmed back to a level closer to 4 percent in the late 90s.

The Mercer study, based on a May survey of 1,571 medium-sized and large companies, found employers are granting average increases of 3.3 percent this year. The figure is 3.4 percent, not counting firms that have imposed pay freezes. Firms plan average increases of 3. 5 percent next year, the survey found.

The increases vary somewhat by the type of worker. Executives are due for 3.7 percent increases this year, but hourly and clerical and technical workers should expect raises of 3.3 percent, the survey found.

The Conference Board survey, done in April and May, collected data from 527 mostly large companies, of roughly 2,500 who received the survey in the mail.

It found employers are granting average increases of 3.5 percent this year and plan the same next year, and did not ask about pay freezes.

Each survey found some anomalies in certain industries. While pay freezes are becoming the exception, they are more likely in business and information services firms, computer software companies, consulting, legal and accounting practices and utilities, according to the Mercer survey.

The Conference Board survey found that insurance firms granted smaller raises this year than they had initially planned. But those firms are again planning the largest increases for 2005, with pay raises between 3.7 percent and 3.9 percent.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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