Compensation trends reveal critical strategies to boost employee retention and satisfaction.
AEC firms have long faced a recruiting and retention crisis – and our industry isn’t alone. According to recent Gallup polling, one in two U.S. employees is open to leaving their organization. Forty-two percent of employees who voluntarily left their organization in the past year reported their manager or organization could’ve done something to prevent them from leaving. When asked what could have been done to prevent their departure, additional compensation and benefits topped the list at 30 percent. Nearly half (45 percent) of voluntary leavers reported that neither a manager nor another leader proactively discussed their job satisfaction, performance, or future with the organization in the three months before they left.
Compensation and benefits are critical employee retention factors, and engaging employees in conversations about their performance and future with the company can be a game-changer. If issues aren’t addressed, and if your company isn’t offering competitive compensation and benefits, employees are likely to look elsewhere.
In today’s competitive job market, AEC firm leaders need to keep a close eye on their staff salaries through careful budgeting and strategic planning. How does your firm stack up against the rest of the industry? Let’s take a look at some recent compensation trends:
- Budgeting for pay increases. According to Zweig Group’s 2024 Policies, Procedures & Benefits Report, a significant majority (89 percent) of firms budget for staff pay increases. The median raise among these firms was 5 percent last year, and this figure is projected to remain the same for the current year. While a 3 to 5 percent increase has traditionally been a safe benchmark, the current economic climate, increased workload due to backlog, and high turnover have prompted many firms to consider more substantial raises to maintain employee satisfaction.
- Formal compensation programs. Implementing a formal compensation program can significantly standardize employee pay rates across a firm. These programs typically outline set pay ranges based on job grade and experience level, providing a clear framework for salary decisions. However, only 52 percent of surveyed firms have such a program in place. While formal compensation programs ensure consistency, they may limit the flexibility needed to reward exceptional performance or adjust salaries for those not meeting expectations.
- Determining salary raises. Firms employ various methods to determine salary increases. The most common approach is a formal salary/wage review process, used by 70 percent of firms. Other methods include management’s discretion (66 percent) and annual across-the-board increases (32 percent). Among firms using a formal review process, 95 percent conduct these reviews annually, with 78 percent adhering to a pre-set calendar date. This structured approach helps ensure that salary reviews are conducted systematically and fairly.
- Criteria for evaluating salaries. Firms use multiple criteria to evaluate salaries, with job performance being the most common (92 percent). Other important factors include salary surveys (87 percent), firm growth or profit (74 percent), inflation (63 percent), attitude (43 percent), and the growth or profit of the employee’s office (38 percent). This multifaceted approach allows firms to make well-rounded salary decisions that reflect both individual and organizational performance.
- Retirement plans and contributions. Retirement benefits are a crucial component of total compensation. A substantial majority of AEC firms (91 percent) offer a 401(k) plan, with a median waiting period of three months before new employees can participate. A median of 90 percent of eligible employees participate in their employer’s 401(k) plan. Most firms (85 percent) make fixed or matching contributions based on a formula, while 31 percent offer discretionary contributions as management sees fit. The median matching rate for employee contributions is 75 percent, with a maximum match of 5 percent of an employee’s salary. The median contribution to employees’ 401(k) plans in the last fiscal year was $2,500 per full-time equivalent, or 1.7 percent of net service revenue.
The greatest single expense for AEC firms is their payroll. In many firms, direct labor alone accounts for 30 percent or more of the firm’s net service revenue. The amount of compensation a firm can afford is limited by factors such as the amount of work it sells and the fees it produces. The challenge for design firms is to strike a balance between profits and payroll to ensure both employee satisfaction and the firm’s financial well-being. By benchmarking salaries, implementing formal compensation programs, conducting regular salary reviews, and engaging in meaningful conversations with employees, AEC firm leaders can address dissatisfaction and improve retention rates. As the industry navigates ongoing recruiting and retention challenges, ensuring that compensation aligns with employee expectations will be vital for long-term success.
Sara Parkman is a content manager at Zweig Group and senior editor and designer of The Zweig Letter. Contact her at sparkman@zweiggroup.com.
