Labor market and inflationary pressure are fueling higher-than-projected pay increases, according to the latest Salary Budget Planning Report by WTW.
The report revealed overall salary increases in the U.S. are projected to rise to 4.6% in 2023, up from an actual spend of 4.2% this year, as the majority of companies react to inflationary pressures (77%) and concerns over the tighter labor market (68%).
The report also found that while current pay budgets have risen to 4.2%, in 2022 more than two-thirds of companies (70%) spent more than they originally planned on pay adjustments for the past 12 months.
“In addition to inflationary pressures and concerns over tight labor market driving higher salary increases, organizations are looking to drive retention and meet employee expectations,” said Hatti Johansson, research director, Reward Data Intelligence at WTW. “Salary budgets have remained stable around 3% for the last decade. A 1% to 1.5% jump (from roughly 3% to roughly 4.5%) is a huge increase and for most companies represents hundreds of millions of dollars.”
Johansson also shared that 67% of organizations have said that their total compensation spend had increases in 2022 compared to 2021.
“The last time we had 4% or more salary budget averages in the U.S. was before the financial crisis (from 2008-2010), so it has been more than 20 years since we have seen increases this high. There is a whole generation of employees who have experienced salary increases tracking higher than inflation year over year, and they are expecting their salaries to rise with inflation.”
WorldatWork’s “2022-2023 Salary Budget Survey” from August had similar findings.
In addition to pay pressures, the WTW report found three in four respondents (75%) also are experiencing problems with attracting and retaining talent — a figure that has nearly tripled since 2020. In fact, the tight labor market has been an influencing factor in the decision of nearly seven in 10 companies (68%) to increase salary budgets.
“There are multifactorial trends driving the attraction and retention challenges, including demographic changes, pandemic-related labor participation and labor slowdowns which have reduced the overall talent pool,” Johansson said. “This is while many organizations are looking to increase headcount for certain positions. The higher salary increases are due largely to employers’ desire to retain and attract workers by ensuring their pay is competitive in the labor markets in which they compete for talent.”
Based on their findings, Johansson said more organizations are also considering more frequent salary increase adjustments.
“Just over 20% of organizations have provided more frequent base salary increases or off-cycle adjustments, almost 20% more are planning or considering,” she said.
While most organizations are doing two adjustments per year, they are being more targeted in their approach, with over 50% conducting compensation review of specific employee groups (further 27% are planning/considering) and over 40% paid targeted base salary increases for specific employee groups (further 34% are planning considering).
As organizations prepare for 2023, ongoing and diligent monitoring of labor markets and economics combined with flexibility will be needed, said Johansson.
“For now, continued higher budgets are projected in the U.S.,” she said. “However, there is the threat of an economic slowdown with many headlines focused on high profile layoffs from tech organizations. As employees seek higher wages to mitigate the cost of living, they need to balance cost management, and attracting and retaining talent by using multiple actions to keep their employees, not just pay increases.
“This may range from improving the employee experience to broader emphasis on diversity, equity and inclusion, or more workplace flexibility. In addition, they may need a more targeted approach to retain specific employee groups by offering retention bonuses or spot awards or adjusting salary ranges more aggressively.”
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