Compensation is always an important part of the employer arsenal, but in 2023, that might be more true than ever. Fueled by a confluence of factors—rising inflation and changing employee expectations among them—HR leaders are planning to turn to larger-than-usual salary increases in 2023, data indicates.
But reevaluating employee salaries isn’t the only thing HR and other company leaders need to think about in the coming year. Here is what to know about salary strategies as 2023 approaches.
Next year looks to be a “banner year” for salary increases. A report from Salary.com, which surveyed 1,000 HR professionals, finds that nearly half of U.S. employers plan higher year-over-year budget increases next year compared to 2022. The long-predominant 3% raise, which started its decline last year, has been replaced by a median raise of 4% across all employee categories, the survey finds. And a quarter of employers plan to give increases in the range of 5%–7% in 2023.
“2023 promises to be another banner year for employees seeking salary increases,” says Chris Fusco, senior vice president of compensation at Salary.com. That’s a far cry from just a couple of years ago. When the pandemic began in 2020, Fusco adds, just under 10% of employers planned a higher salary budget increase than in the prior year.
Other reports are finding similar results: New Willis Towers Watson data finds that salary boosts are forecast to be 4.6% in 2023, up from a mid-year estimate of 4.1%. And compensation consultancy Pearl Meyer data finds that 40% of business and HR leaders expect to provide higher salary increases next year than in 2022.
Rising inflation—and talent wars—are driving the trend of higher salaries. Not one but two factors are helping to fuel higher salaries in 2023. Inflation has soared over the past year, causing employees to shell out more for their groceries, gas, housing, medical costs and more. Although inflation has fallen a bit in the last month from 40-year-highs (inflation jumped 7.7% in October versus a year ago, according to the latest cost-of-living index), costs are still hitting workers hard and resulting in a dive in their financial confidence. With employees struggling, many employers are responding. Gartner, for instance, found that 63% of executives plan to make compensation adjustments in response to high inflation.
Plus, a competitive job market is making it all the more imperative for employers to rethink salaries, as well as benefits, to not only entice workers to join their ranks, but sway them to stay, experts say. A survey from human resources consulting firm Mercer finds that more than two-thirds of U.S. employers say they are looking to enhance their health and benefits offerings next year in order to attract and retain talent. Better healthcare access, more affordable medical care and increased family-friendly benefits are all on tap, Mercer found.
Salary transparency laws are here. Pay transparency laws are taking effect throughout the country—from New York City to Colorado and, starting Jan. 1, California. It’s a big shift that has big implications for employers in those areas—and elsewhere.
One thing HR leaders should keep in mind about the new rules? Posting broad salary ranges in response to the law rather than good faith estimates—say, a salary range that is $75,000-$250,000—is likely going to hurt employers by not only opening an employer up to city or state penalties, but also by deterring potential candidates. “This is forcing organizations to put out one of the things that really builds trust, and that’s transparency around pay,” says Tony Guadagni, senior principal in the Gartner HR practice. “If done right, it could be a really positive thing, a boon for organizations.”
Bonuses may be an even bigger part of the equation. What’s a hot job market without salary increases, benefits enhancements and bonuses? More employers say they’re offering, or considering offering, bonuses to employees to both reward workers and help them with rising expenses. According to Pearl Meyer, 5% to 20% have increased or plan to increase competitive positioning for one or more pay components, like base salary, cash bonuses or equity-based incentives.
Compensation attention should be focused on both new hires and current employees. Many employers are upping the ante for potential hires, offering large paydays. A survey of more than 635 workers and 650 hiring managers by software firm Capterra, for example, finds that companies are increasing pay for new hires: 65% of hiring managers say starting salaries and wages at their organization are higher than usual right now due to inflation and talent shortages. On average, new hire pay is 9% higher than usual. But, some analysts warn, efforts to woo candidates could be to the chagrin of current employees, many of whom are suffering from financial stress as they reel from the soaring cost-of-living and seek help from employers in the form of compensation increases.
Though a focus on competitive pay for new hires “solves one problem—filling important job openings,” says Brian Westfall, principal HR analyst with Capterra, it’s also creating pay discrepancies with tenured employees.
“That’s causing tension. Inflation has already left workers feeling slighted about the reduced purchasing power of their paychecks,” he says. “The fact that new hires are getting higher wages and salaries right now feels like adding insult to injury.”
Westfall recommends that HR leaders audit compensation frequently to identify glaring discrepancies between new and existing employees. “You may not be able to increase salaries and fix every discrepancy you find, but hopefully you can close the gap in the worst cases,” he says.