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Compensation Increase Trends in 2023

What the Data Reveals

We are well into the middle of the year and most companies have made it through the daunting period of performance reviews and annual raises. So how have increases played out so far?  Mercer’s recent survey revealed that 2023 annual merit increases averaged 3.8 percent, while total compensation – which includes base salary, incentive pay, and any other type of variable compensation – increased by 4.1 percent. The averages are below what U.S. organizations projected in November but above the 2022 compensation increases, according to Mercer’s U.S. Compensation Planning pulse survey.

Mercer found that pay increases have varied by industry. The life sciences, energy, and services industries have led with 4.5 percent, 4.4 percent, and 4.4 percent total compensation increases. Retail, wholesale industries and healthcare services have fallen behind with 3.6 percent total compensation increases. There seem to be several factors, such as the ongoing high inflation and the competitive labor market, that have led to these aggressive compensation strategies – the most aggressive we have seen since 2008. However, the recent downward trend in inflation may be one of the reasons 2023 increases have been lower than initially projected. Data also suggests an overall slowdown in terms of incentive payouts and market and equity adjustments.

Rising Expectations and Increased Pressures

Data from the ADP Research Institute’s annual global survey found that 83 percent of workers expect a raise in 2023 of 8.3 percent, on average. Globally 10 percent of workers expect a 15 percent salary increase over the next year, and 18 percent are expecting an increase between 10 and 12 percent over the next year. Meanwhile, 50 percent of U.S. workers feel that they are underpaid in their current role. The reported figures are concerning, as these high expectations are placing even more pressure on employers.

Staying competitive in the market for external talent all the while rewarding existing employees at a level that remains equitable with the pay of new hires has been a major concern for employers over the last few years. This problem is becoming more noticeable to employees as pay transparency increases.

Looking Ahead

Compensation continues to be one of the strongest tools against the ongoing tight labor markets, but this year employers are being more strategic in their decisions. Perhaps less reactionary to market conditions and more tactical in their approach to compensation, they are concentrating on making changes to better manage salary budgets and solving critical issues, such as pay equity. It is important to make sure that the foundations for effective compensation management are strong, market-driven, and equitable to support informed decisions. To aid in this effort, NFPCC recommends annual compensation reviews and pay equity analyses as a standard practice to reinforce your compensation strategy and ensure programs are competitive and equitable.

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