As a tight labor market and inflationary pressures linger, employers are looking to continue competitive pay hikes for employees in 2024—although the aggressiveness of raises may be starting to cool, new data finds.
U.S. organizations are budgeting an average increase of 4 percent in 2024, according to consulting firm WTW, which surveyed more than 2,000 U.S. organizations for its Salary Budget Planning Survey. That number is down from the actual increase of 4.4 percent in 2023 and the 4.2 percent increase in 2022, but the projected 2024 figures remain higher than the 3.1 percent salary increase budget in 2021 as well as other increases in pre-pandemic years.
“While we are seeing lower salary increases forecasted for next year, they’re still well-above the ones we’ve seen for the past 10 years,” said Hatti Johansson, research director of reward data intelligence at WTW. “This shows that companies are striving to stay competitive in an ever-changing work climate.”
Although the survey is an early forecast of next year’s pay strategies, it also provides further clarity into how and why companies budgeted for raises in 2023. The survey found that more than two-thirds (70 percent) of U.S. employers budgeted for pay raises to be either the same or higher in 2023 than 2022. Roughly 1 in 6 companies (14 percent) have budgeted for pay raises to be lower than last year.
Many factors are likely driving continued changing compensation strategies, from high inflation to the competitive labor market, which is still strong despite signs of slowdown in some industries. The WTW survey found that concerns over a tighter labor market impacted by worker shortages is the most commonly cited driver influencing changes in 2023, cited by nearly two-thirds of survey respondents expecting changes in their salary budgets.
These factors will continue to drive competitive pay hikes in 2024, analysts said.
“While layoffs are happening in certain industries, like tech, they are still not widespread,” explained Lesli Jennings, North America leader of work, rewards and careers at WTW. “Therefore, they are not impacting the overall health of the job market.”
Meanwhile, she said, high job creation and relatively low unemployment is “putting pressure on organizations to raise starting salaries to attract new employees.” That’s in part why the survey finds in addition to forecasted pay raises, organizations are making other compensation changes. The survey finds that half of respondents have reviewed compensation of specific employee groups, and another quarter are planning or considering doing so. Additionally, respondents are hiring people higher in relevant salary ranges (44 percent), raising starting salary ranges (43 percent), reviewing compensation of all employees (42 percent), and enhancing use of retention bonuses or spot awards (40 percent).
WTW’s survey is among the first to forecast employers’ 2024 salary strategies—an important barometer for HR leaders when it comes to retention and attraction efforts.
In 2022 and 2023, pay raises were among the highest they had been in years. Consulting firm Mercer reported earlier this year that U.S. employers reported 2023 annual merit increases have averaged 3.8 percent, while total compensation—which includes merit awards as well as all other types of compensation increases impacting base pay, such as promotional, cost-of-living and minimum wage—increased by 4.1 percent. Seattle-based compensation software firm Payscale reported that 92 percent of organizations gave raises in 2022, while 80 percent plan to do so in 2023.
Employee expectations for higher pay have also jumped considerably, with the ADP Research Institute finding that the overwhelming majority of workers expect a bigger payday from their employers, and if they don’t get it, employees may be ready to walk.
But some insiders have said that the pay situation, although still competitive, is starting to calm down as economic concerns begin to overtake red-hot inflation and the job market.
“Companies were playing catch-up last year [in regard to pay],” Payscale Chief People Officer Lexi Clarke said earlier this year. “That being said, as inflation starts to ease, as the job market cools a little bit and as comp strategies are more set in place in different organizations, we’ll start to see those raises really stabilize from last year’s payouts as companies become a little more cautious with the uncertainty around economic outlook.”
Jennings said that while annual salary increase budgets follow economic indicators, simply because the U.S. economy is slowing is not enough of a direct correlation to say that salary increase budgets should start trending downward again.
“Salary budget changes typically lag economic changes by 12 to 18 months, except in times of drastic economic downturn,” she said. “Given our current unemployment rate—even with what most experts are predicting as a gradual increase by year end—it’s unlikely that salary increase budgets will be significantly lower in the next year.”
In general, employers will likely eye healthy pay increases to keep employees, while overall thinking strategically about their pay models, Jennings said.
“Organizations need to consider other factors impacting budgets, beyond labor market challenges, such as affordability and business performance,” she said.