A survey by Deloitte and Touche shows pay increases are expected to average 3.5% at large companies in 2003, the third straight year of modest pay increases. Some companies are also eliminating bonuses or paying employees less than half the bonuses they received in better times.

The survey shows the trend toward lower pay increases is contributing to low employee morale and undermining the loyalty of many companies' most valuable employees. A full three-quarters of companies surveyed admit that the biggest problem they face from constrained compensation budgets is an inability to sufficiently recognize top performers versus average or poor performers. Nearly half, or 48 percent, also acknowledge that low employee morale is a problem.

To boost morale and engender greater loyalty among their most valuable employees, Glueck suggests that companies step up alternative reward strategies. Three popular techniques:

• More rapid promotion opportunities.
• Investment in training that directly enhances top performers' skills and development, such as technical and management courses, and special work assignments.
• Redefined work/life flexibility opportunities that acknowledge the reality of bigger workloads for all employees due to downsizings.

"The biggest danger from continued low compensation is the negative impact it has on a company's best performers," says David Glueck, a leader in Deloitte's national Human Capital Advisory Services practice. It ". . .undermines their incentive to perform at their peak, so productivity is almost certainly falling. And, when the economy picks up, they are much more likely to leave."

Learn more about Deloitte's Human Capital Advisory Services practice.