- Below projections but above 2022 actuals. Mercer’s “March 2023 U.S. Compensation Planning Survey” found that total compensation increases averaged 4.1% and merit increases averaged 3.8%, which were slightly below what U.S. organizations projected in November, but above 2022 compensation increases.
- Fighting against pay compression. A key concern for employers in the past two years is balancing the need to stay competitive in the market for external talent while also rewarding existing employees at a level that remains equitable with the pay of new hires. This issue becomes more noticeable to employees as pay transparency increases.
- Pay equity analyses remain critical. Organizations should conduct analyses to show that their tenured, performing employees with experience in the role, have appropriately reached the market rate, or higher, depending upon performance. Further, ensuring they are hiring tenured employees into the appropriate range is also important.
- Remain vigilant with compensation investments. In an era of increased transparency, it’s important to make sure the foundations for effective compensation management are strong, market-driven structures and equitable to support informed decision-making.
U.S. employers shelled out total compensation increases that averaged 4.1% and merit increases that averaged 3.8% in 2023 to remain competitive in a strong labor market.
This is according to Mercer’s “March 2023 U.S. Compensation Planning Survey,” which noted that while the 2023 compensation increases are the largest employers have provided since the 2008 financial crisis, the increases fell slightly short of what employers were projecting during November 2022.
Research: WorldatWork's 2022-23 Salary Budget Survey
Mercer’s November pulse survey revealed organizations were budgeting 3.9% for merit increases and 4.3% for total increases. Despite the 2023 actuals falling short of the projections, the figures represent a significant increase from 2022 compensation increases, which were 3.4% and 3.8% for merit and total increases, respectively.
“The survey indicates that employers are continuing to invest in compensation to combat prolonged tight labor markets, but they are doing this with more prudence than what we saw in 2022,” said Lauren Mason, senior principal in Mercer’s career practice.
Fighting Pay Compression
A key concern for employers in the past two years is balancing the need to stay competitive in the market for external talent while also rewarding existing employees at a level that remains equitable with the pay of new hires.
Unfortunately, many organizations are struggling to avoid pay compression, and their shortcomings are more apparent with the presence of pay transparency. The scenario many organizations are finding themselves in, if they are required to or are voluntarily providing a salary range on job postings, is an existing employee in the same or similar role might discover they are making less than what is being offered to external candidates.
“This inevitably creates many questions for employees. These perceptions could be grounded in reality, but most often stem from a lack of understanding of how compensation is set and maintained,” Mason said.
Organizations must be prepared by ensuring they have conducted pay equity studies and addressed any gaps, she said. They should also educate employees and managers about compensation processes, so they understand how organizations deliver and maintain fair and equitable compensation.
Mercer’s survey found that employers turned to promotions in 2023 as part of their total compensation increases, with the average promotional increase in salary being 9.4% when an employee is promoted one level. At the non-executive level, the salary increase is 9.8% and the hourly pay increase is 8.5%.
However, Mason noted promotions, are not a quick fix to solve for internal equity concerns, as long-tenured employees often fall behind the market over time since organizations do not differentiate merit awards enough to ensure those employees lower in the range are earning a sufficient pay increase to move them to the market (midpoint of the pay range) fast enough.
This methodology, she said, collides with external hiring and pay practices, as organizations often hire new employees at or near the market rate, putting them at a premium, which may not be appropriate depending on their experience.
“Organizations should conduct analyses to show that their tenured, performing employees with experience in the role, have appropriately reached the market rate, or higher, depending upon performance,” Mason said. “Further, ensuring they are hiring tenured employees into the appropriate range is also important.
“Promotions may be warranted, but only if the employee has demonstrated skills and capabilities for the next level, and there is an opening within the organization for a higher-level role.”
Pay Transparency and Equity Effects
Mercer’s survey also found that unbudgeted pay increases outside of the typical merit cycle have increased in recent years, and many employers indicated that they were making changes to manage compensation increases with additional governance.
According to the survey, one in three employers indicated that they were adding additional governance or approvals, limiting or freezing off-cycle increases. Further, one in four employers indicate they will be adding additional governance or approvals, limiting or freezing promotional increases.
The survey found that 37% of organizations are exploring sharing pay ranges internally and externally in a more standardized approach, which is up from 24% in August 2022.
With labor shortages expected to persist, alongside other external economic factors such as inflation, organizations will need to continue to stay on top of the market for compensation. However, Mason said, organizations should be more judicious in where those compensation investments are delivered than they were in 2022, given the macroeconomic environment.
“Focusing on critical jobs and equity and compression adjustments for long-tenured employees are important,” Mason said. “In an era of increased transparency, make sure the foundations for effective compensation management are strong, market-driven structures and equitable to support informed decision-making.”
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