Companies are projecting median merit increases of 3.0 percent for 2010, according to the Watson Wyatt 2009/2010 U.S. Strategic Rewards survey report. The survey includes responses from 235 large U.S. employers gathered in May 2009.

Last year, before the onset of the recession, companies projected 3.5 percent merit increases for 2009. Now, companies say median merit pay increases will be 2 percent in 2009.

Additionally, fewer companies plan to eliminate pay raises in 2010. According to a separate survey of nearly 900 companies conducted by Watson Wyatt Data Services, a subsidiary of Watson Wyatt, only 10 percent of companies are planning no pay raises for workers in 2010 compared to 25 percent this year.

“This has been a very difficult year for both employers and their workers,” said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt. “But there is some good news on the horizon. Employers plan to give larger raises next year, and many plan to reinstate previously cut pay raises as planning for an eventual economic recovery continues.

Watson Wyatt’s Strategic Rewards survey also found that companies are giving smaller raises to employees who do not meet performance expectations. In 2009, workers who “partially met expectations” will receive median merit increases of only 0.2 percent, down from 1.5 percent in 2008. Workers who “exceed expectations” this year will receive a median 3.1 percent increase, while workers who “far exceed expectations” will receive a 4 percent increase.

“With companies operating on limited budgets, employees can expect their performance on the job to come under increased scrutiny,” said Laurie Bienstock, U.S. director of strategic rewards consulting at Watson Wyatt. “Workers who do not meet expectations will see their raises cut or eliminated, enabling employers to reward their best performers.”

The recession has significantly reduced annual bonus pools as well. Funding for annual incentive awards dropped notably from 99 percent in 2007 to 82 percent in 2008. In 2009, annual incentive awards are expected to be funded at 75 percent.

“Bonuses are certainly a casualty of the recession this year,” said Sejen. “Still, it remains crucial for employers to find ways to reward top-performing workers for their role in contributing to the company’s bottom line.”

To download a PDF of the advance highlights from Watson Wyatt’s 2009/2010 U.S. Strategic Rewards report, visit www.watsonwyatt.com/StrategicRewardsHighlights  

To view a summary of the Watson Wyatt Data Services 2009/2010 Salary Budget Survey results, visit www.watsonwyatt.com/salarybudgetsurveypreview