Today, Mercer released the results of its 2023 US Compensation Planning Survey revealing that while salaries are going up, 2023 compensation budgets and salary projections for US employers are expected to lag behind inflation.
While nearly 80% of organizations reported that they are just in the preliminary stages of determining their 2023 annual increase budget, the survey found that overall salaries are going up. Employers reported they are budgeting an average of 3.8% for merit increases – compared to the 3.4%1 actually delivered in 2022 – and 4.2% for their total increase budget for 2023. The total base salary increase budget includes other base pay increases such as promotions and cost of living adjustments, in addition to merit increases.
Across industries, Financial Services is leading the market at 4.0% merit and 4.7% total increases. The Healthcare industry is lagging behind the market at 3.3% merit and 3.6% total increases. Interestingly, the Technology industry typically leads the market with their compensation awards, yet the survey found that while Technology employers are right at the national average for total increase (4.2%), there is a slight lag on the national average for merit increases (3.7%) – a departure from previous years.
The labor shortage was reported as the top driver for increases in compensation budgets for employers, which aligns with long-standing practices focused on paying based on demand for labor, not inflation or cost of living. The disconnect in compensation budgets and rising inflation is creating frustration with workers, who have seen all of their wage gains eroded by rising costs. This will continue to drive dissatisfaction with compensation programs and pressure employers to increase wages in the months ahead. The tight labor market with high numbers of job openings, low numbers of unemployed workers, and heightened turnover may force employers to respond.
The study found that employers’ primary response to inflation is a reactionary one of providing ad-hoc off-cycle wage reviews and/or adjustments (reported by 38% of employers). This is a continuation of practices seen over the last year, which resulted in significant gaps in employers’ total compensation spend relative to budgets for 2022. This is especially true for hourly workers, whose base pay rose on average 6.7%2 in 2022, despite a 3.8%3 total base pay increase budget.
“When it comes to compensation decisions, employers are caught in the middle of recessionary concerns, a tight labor market, and shifting employee expectations due to inflation. Given the financial uncertainty that currently exists combined with the tight labor market, employers should consider setting flexible budgets and prioritize investments in critical and fast-moving segments, such as their hourly workforce,” said Lauren Mason, Senior Principal in Mercer’s Career practice.
Only 10% of US organizations say that recessionary concerns are having a high impact on their salary increase budgets right now. However, should the economic situation continue to decline, that may change this outcome. The survey found that no employers are currently planning to freeze pay in 2023.
Despite an influx of legislation aimed at increasing pay transparency, the survey found employers have been slow to modify their communication of pay ranges outside of state mandates. Over half (53%) of organizations said they will comply with local laws and have no plans to broaden transparency beyond what is required. As it stands today, 44% of organizations do not communicate any information regarding an employee’s current compensation grade or band, and only 21% of employers make available compensation bands for all jobs outside the employee’s current role.
“With more states requiring external publication of pay ranges on job postings, it is critical that organizations build their own story around compensation because without the right context, employees will create their own narrative,” added Mason. “Organizations should also remember that pay is only one tool in their toolkit; take a broader view of total rewards and implement benefits that help meet workers’ needs – particularly those that are low to no cost, but of high value – like flexible working, or financial wellness programs.”