- Healthy salary increases. U.S. employers forecast raising their total salary budgets between 3.8% and 4.1% for 2024.
- Influencing factors. Inflation and the labor market’s voluntary turnover rate may be dropping, but organizations are continuing to use compensation to distinguish themselves from competitors.
- Other benefits to consider. Organizations need to take a total rewards focus to look beyond pay to further evaluate what employees value like healthcare and retirement.
Inflationary pressures and concerns about a tight labor market continue to cloud the horizon as a trio of surveys point the way forward on 2024 compensation plans.
U.S. employers forecast raising their merit increase budgets by 3.5% and total salary increase budgets by 3.8% on average for 2024, according to Mercer's U.S. Compensation Planning Survey November 2023 edition.
WorldatWork’s “2023-24 Salary Budget Survey” of 2,146 participating organizations found U.S. employers are projecting 4.1% pay increase budgets in 2024 and 3.6% merit increases on average.
Meanwhile, employers are planning an overall average salary increase of 4.0% for 2024, according to the latest Salary Budget Planning Survey by WTW.
The pressures of the labor market, inflation and uncertainties continue to weigh-in for employers as they head into 2024 with their plans for pay increases, said Alicia Scott-Wears, a compensation content director at WorldatWork.
Since the early 2010s, it has been typical to see U.S. salary budget increases in the range of 2.8 to 3.2%, Scott-Wears explained, so a salary budget range of 3.8 to 4.1% is a notable elevation — at average, 32% higher than pre-pandemic standard.
“Still, a 4% increase is down from 2023, which saw actuals at 4.4%, so it’s a mild pullback, and globally, salary increase budgets are generally stabilizing or pulling back slightly in most cases,” she said.
While both inflation and the labor market’s voluntary turnover rate may actually be dropping, organizations are continuing to use compensation as a main driver to distinguish themselves from competitors.
“We are seeing healthy salary increases forecasted for 2024,” said Hatti Johansson, research director, reward, data and intelligence, at WTW. “Though economic uncertainty looms, employers are looking to remain competitive for talent, and pay is a key factor.” At the same time, she said, organizations should remember pay levels are difficult to reduce if markets deteriorate.
“It’s best to avoid basing decisions that will have long-term implications on their organization on temporary economic conditions.”
Trendspotting
While pay growth remains strong for most organizations in the upcoming year, it is starting to slow down, according to Lauren Mason, senior principal, career, at Mercer.
“We see that practices that had become the norm over the last two years — such as premiums for new hires and out-of-cycle pay increases — are slowing as well,” she said.
Companies are becoming more prudent about their compensation spend, she said, as well as focusing on providing market and equity pay adjustments for employees as a result of pay compression or internal equity.
The other trend is growth in hourly pay, according to Mercer research.
- The median internal minimum wage (a company’s lowest wage or starting rate for any position) is now up to $16.70, up from $15.50 in 2022.
- Across industries, median internal minimum wages vary, with the lowest rates being seen in retail (median of $13.80, which is notably the only industry below $15/hour), and the highest rate of $19.50 in energy.
- Retail also had the fastest growing internal minimum wage (up from $12.20 last year, an increase of 13%).
“It’s a reflection of the need for retail hourly wages to keep pace,” Mason said, “as many employees have transferable skills they can utilize in front-line roles in other higher paying industries such as services, banking or manufacturing.”
There were no major shifts in 2023 related to pay for performance strategies, Mason said, as the vast majority of employers continue to indicate that they utilize performance as a key factor for differentiating merit awards.
However, one “emerging” area of compensation is skill-based pay, which Mason said can provide many benefits, “such as aligning pay strategies to hot skills and rewarding the attainment of new skills.”
Inflation Frustration
How much does inflation affect how organizations plan on using merit pay increases in 2024?
Inflation certainly adds more pressure on pay increase budgets, said Mason, but employers view cost of labor as the primary factor when setting budgets.
And while there is a strong correlation between the economy and salary budgets, there are many factors that play into pay increases, said WTW’s Johansson.
“Even as inflation cools, salary increases are — again — above inflation,” she said, “due to a healthy job market and successful business performance in many industries.”
These days, when getting pay right is the absolute minimum requirement, said Johansson, organizations also need to continue to supplement pay with non-monetary elements, like workplace flexibility and focusing on the employee experience.
“Companies need to take a total rewards focus to look beyond pay to look at what employees value like health care and retirement,” she said.
Looking Ahead in 2024
As the labor market and economy continue to stabilize and pay growth gradually moderates, employers should brace themselves for a shift in the compensation landscape next year, said Johansson.
“In this environment, it becomes crucial to strategically allocate compensation investments where they are most needed,” she said. “This includes prioritizing faster-moving market segments, such as hourly pay, as well as skills that are in high demand.”
It's also essential to provide market and equity adjustments for employees who may have fallen behind.
“With pay transparency on the rise, employers will face mounting pressure to not only explain, but also defend employee pay levels relative to the market and peers,” Johansson said. “Navigating these challenges successfully — with tighter budgets — will be key to getting compensation right in 2024.”
Additionally, top skills and top performers will be a priority for employers in 2024, said WorldatWork’s Scott-Wears.
“Many employers have been challenged to retain top performing talent, so that may factor into allocations too,” she said. “Turnover is reportedly slowing globally, and inflation is easing slightly as well, so thoughtful allocations have the promise of being impactful with employees.”
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