After record-high pay raises in 2023, today’s tight talent market appears to be primed to continue driving employee compensation even higher next year—a reality that puts added pressure on HR and compensation professionals to get their salary budgets right.
Payscale—a provider of compensation data, software and services—reports that its eighth annual Salary Budget Survey found pay increases in 2024 are predicted to be 3.8% on average in the U.S., instead of the 3% that has been the standard for decades. And it projects higher increases in some states, industries and other countries.
According to Ruth Thomas, pay equity strategist at Payscale, the last few years have indicated that the “new normal” for salary increases may be in the 3.5%-4% range. The main driver of the increase is workers, who continue to expect higher pay hikes to regain lost value eaten up by inflation.
‘An employee’s labor market’
The Salary Budget Survey analyzed data from 1,757 participating employers across the U.S., Canada and 14 international locations between May and June of 2023 (the international survey will be released later this summer).
Today, 78% of employers surveyed in the U.S. and 81% of those in Canada say that their 2024 salary increase budget is the same or higher compared to last year. While the 3.8% prediction for next year matches the figure the survey predicted for this year, record inflation and the competitive labor market resulted in actual pay increases in 2023 that were 4% on average.
However, with inflation decreasing and the labor market loosening, the percentage of organizations expecting to lower their salary increase budgets for the next year has risen from 9% to 22%.
“Although employers may want to bring salary budgets down after recent wage growth, it is still very much an employee’s labor market with skills shortages persisting in some sectors,” Thomas notes.
Consider the context with salary increase projections
However, the higher-than-usual salary increase trend could change, she says, if the U.S. enters a recession.
So, “in addition to salary budget reports, organizations will need to keep an eye on wage growth trends and continue to invest in up-to-date market data to remain competitive and ensure that pay is fair,” Thomas says.
In addition to competition for labor, Thomas says Payscale saw more organizations stating that their reasons for higher budgets are due to changes in compensation philosophy or competitive positioning (34%, up from 26% last year). That could suggest a tie-in to the growing push for pay transparency.
“We know many organizations are reviewing pay ranges and addressing internal pay compression as they manage the challenge of pay transparency,” she says.
On the other hand, one of the primary reasons cited for lowering pay increase budgets is because higher increases were given previously, which indicates a desire to return to pre-pandemic norms.
No matter which direction budgets are headed, Thomas suggests that when setting them, HR and compensation professionals need to consider both their company’s business strategy and talent strategy, as well as external factors.
“Knowing what other organizations are giving for pay increases is useful, but it is not the only consideration,” she notes. “You also need to do market analysis and pay equity analysis and budget for adjustments based on external or internal pay inequity, which may be budgeted separately from company-wide base-pay increases.”