- Take a micro view of the economy. Your approach to setting salary increase budgets should be taken with your organization’s financial and competitive situation in mind, rather than what you are reading in today’s headlines.
- The reason behind layoffs. Layoffs in the high-tech and e-commerce industry provide a valuable salary increase-related lesson. These companies over-hired and overspent to manage continued anticipated growth that didn’t materialize.
- Addressing the inflation question. While salary increases may hit historic highs, they still won’t match inflation of 6.5%, nor should they. It’s the same cost of labor versus cost-of-living argument that makes matching salary budgets to inflation just bad business.
- A multifaceted approach to attraction and retention. Employers should use a “Goldilocks” approach to setting salary increase budgets, lean on total rewards and ensure you’re sending the correct message to existing and prospective employees.
Confusion is a natural response to recent headlines about the economy, the alarming spread of layoffs (particularly in high tech), continued high inflation and the undeniable — yet stubborn — reality of labor shortages.
What does it all mean as organizations plan for 2023 salary increases?
The “recession is coming” message is reminiscent of those childhood trips when the journey seemed unending and you kept asking, “are we there yet?” As of today, the response to that question is also hauntingly familiar: “We’ll get there when we get there!”
For a WTW client in the financial services industry, their burning question was, “should we take a more conservative approach to setting salary increase budgets given the impending recession?” Like all significant expenditures, salary increase budgets should be driven by multiple factors, with affordability at the top, followed by the competitive labor market landscape.
Your approach to setting salary increase budgets should be taken with your organization’s financial and competitive situation in mind, rather than what you are reading in today’s headlines. It also is important to weigh how it may affect your ability to attract and retain employees this year and beyond.
Research: WorldatWork’s 2022-23 Salary Budget Survey
Organizations with salary increases below competitive levels erode their long-term competitive pay position — and usually don’t realize it until years later when they can’t stem turnover or attract the talent they need.
The Impact of Layoffs
While layoff headlines certainly have become “loud,” do they really reflect what’s to come? Or are they a correction in industries that experienced huge growth based on pandemic-driven growth? Amazon certainly was a pandemic “winner,” and the fact that they doubled their workforce from 798,000 employees at the end of 2019 to 1.6 million by the end of 2021 shows the exponential growth they and others in the e-commerce industry experienced.
It is notable that Amazon’s October 2022 layoff, followed by their more recent announcement of additional layoffs, was the largest in its history, but also represented less than 2% of the company’s global workforce or about 28,000 employees. That means the company still has about 774,000 employees more than it did in 2019.
Is that true shrinkage or a correction?
You won’t find it in the headlines, but even organizations conducting layoffs will still budget for 2023 salary increases. Why? Because they still have job openings and most of their workforce to retain. In fact, most organizations planned to spend more on salary increases in 2022 than they did in 2021, according to WTW’s December Salary Budget Planning Report. And they anticipate spending even more in 2023 than they did in 2022 in response to a competitive labor market and inflation-fueled employee expectations.
Layoffs in the high-tech and e-commerce industry provide a valuable salary increase-related lesson. These companies over-hired and overspent to manage continued anticipated growth that didn’t materialize.
That’s the lesson: When you overspend on pay relative to the market, the only way to correct for it is through layoffs.
Inflation’s Influence on Compensation
The last time we saw a U.S. salary increase budget number at or above 4% was 2007, and the only time we have seen more than a 1% increase in salary budgets since we began tracking them in 1980. While salary increase budgets have dropped by more than a full percent (as they did from 2008 to 2009), they have never gone up by a full percent or more.
Clearly the increase in salary budgets is a big deal, but even more significant is the actual amount of money behind these higher salary increases. Higher budgets can represent hundreds of millions of dollars in increased costs for employers. So, why do you have to explain the reason why salary increases don’t match inflation for the 10,000th time?
While salary increases may hit historic highs, they still won’t match inflation of 6.5%, nor should they. It’s the same cost of labor versus cost-of-living argument that makes matching salary budgets to inflation just bad business.
Again: The only way to correct for overspending your salary budget is through layoffs.
Addressing the Talent Attraction/Retention Challenge
Of all the uncertainty employers faced at the end of 2022, finding and keeping the right talent will be a persistent hurdle in 2023 and beyond. Given this reality, here are key considerations for salary increases:
- Use the ”Goldilocks” method for setting salary increase budgets. Not too big. Not too small. Just right. Current times call for salary increases that are neither too conservative nor generous, which means gathering data to truly understand what “competitive” means in the labor market. Employers also should re-examine how their competitive labor market has changed.
- Additional rewards. Ensure other reward elements (e.g., short- and long-term incentives, recognition programs, benefits, flexibility, culture, purpose) are not only competitive, but focused on what employees — both current and prospective — prefer, value and find meaningful. This means leveraging employee listening as well as thinking differently. Look beyond labor-market competitors and creatively think of new ways to define and differentiate the overarching employee experience.
- Segmentation is key. Do away with the one-size-fits-all approach to rewards. What you provide to frontline hourly workers should not be the same as what you provide to corporate knowledge workers. This has always been true, but it’s never been more important.
- The medium is the message. What messages are your reward programs sending, particularly related to salary increases? Always think of pay programs as a communication vehicle first, then decide whether your messages are the ones you intended to send.
Nothing is certain as we start yet another year but, hopefully, for now this helps you navigate the current economic minefield to make effective pay decisions that you can feel good about.
Editor’s Note: Additional Content
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