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Examining the Rise in Salary Increase Budgets

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Companies face unique challenges with their salary increase budgets this year. For the past decade, merit budgets have hovered around 3%, but current trends suggest that salary increase budgets are rising to levels not seen in more than 20 years. As a result, companies are assessing how they can meet strategic objectives amid rising inflation and tough competition for talent.

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When COVID-19 reached the U.S. in early 2020, many organizations responded by reducing their salary increase budgets or doing away with raises altogether. Despite the pandemic and ensuing lockdowns, most organizations were able to fulfill their mission, and many even thrived. However, pandemic-related stressors prompted some employees to leave the workforce, causing a labor shortage. 

Even as they faced ongoing challenges, companies began hiring to fill these positions. Employees discovered that they could switch jobs and potentially receive a significant pay increase. The average pay increase for job switchers in 2021 was about 8% overall and over 12% in some sectors. The existing labor shortage combined with an uptick in employee resignations, a trend known as “the Great Resignation,” and resulted in many organizations scrambling for workers.

Despite the challenges related to attracting and retaining employees, in Q3 2021, the average 2022 merit budget was estimated to be around 3% — in line with previous years. As 2022 approached, the talent shortage persisted. It became clear that salary increase budgets needed to be higher, and Q4 budget predictions increased to just under 4%. 

At the same time, the rate of inflation at the end of 2021 hit levels not seen since 1982, and BDO anticipated that salary increase budgets would continue rising. 

BDO’s “2022 Salary Increase Budget Pulse Survey,” conducted in January and February, polled 440 organizations of various sizes across multiple industries. The survey revealed that budgets are now higher than they have been in decades.

WorldatWork’s “Salary Budget Follow-Up” pulse poll from February had similar findings.   

BDO found that compensation budgets were averaging 4.4% overall and 4.6% among for-profit companies. For those organizations that had recently increased budgets (almost half of the organizations), the upward trend became even more pronounced, with compensation budgets averaging 5.1% overall and 5.4% among for-profits. 

The table below summarizes the findings. Put into historical context, the last time salary increase budgets were over 4% was in 2001. The last time they were 5% or more was in 1991

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Addressing Challenges

These survey findings may be a significant shock to employers’ 2022 budgets. For companies that were initially planning on a 3% budget, a 5.4% budget represents an 80% hike. It is likely that many organizations are not fiscally able to increase budgets to this degree.

For employees, even receiving a 5% salary increase may feel like a loss in buying power. The Consumer Price Index for All Urban Consumers (CPI-U), which measures price increases over the past year, reached 7.9% in February 2022. Though the impact will vary by situation, for instance the cost of gas increased by 38% for the 12-month period ending in February, this places a significant burden on those who commute by car or need a vehicle for their job.

To mitigate the expense of recruiting and training new workers while also ensuring continuity of services, organizations can take steps to support employees. Below are some tactics to address current challenges:

  • Consider providing extra financial support for employees who commute by car or drive as part of their job duties. This support can be delivered in the form of gas cards, parking vouchers or passes for public transportation to encourage its use.
  • If increasing your merit budget is not feasible at this time, consider doing a mid-year assessment to determine if a second pay adjustment is needed. 
  • This is an important time to identify personnel in non-executive roles who are mission critical and/or top performers and prioritize them for a generous enough raise to (hopefully) retain them.
  • While there are always exceptions, in general, lower-wage employees are the ones most affected by inflation, and the dollar value of their salary increase generally results in a minimal impact on purchasing power. As such, focus salary increase dollars on those who are most impacted. 
  • Allocating more of the budget to pay increases for lower-paid employees can do more than just promote retention, it can help differentiate your organization as one that prioritizes fair compensation practices and shows you appreciate your employees.

Economic volatility has led to substantial uncertainty over the past two years. Concerns of a recession soon gave way to a relatively swift economic recovery, and there are now widespread concerns about inflation. While we are not sure what will happen in three months, six months, or a year, it is important to take care of employees but also be pragmatic. 

Companies need to be fiscally responsible to meet their mission in the long run. It is an opportunity for compensation professionals to think strategically about the best approach for their company in both the short and long term.

About the Author 

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Judy Canavan is the managing director of compensation and benefits at BDO. 


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