Even though you may still be working on your organization’s salary increase budget for next year, you should be aware that research is projecting that your peers will be decreasing their budgets compared to 2023.
When 1,200 organizations were asked by Mercer in August what they planned to do budget-wise for the following year, the average projected annual salary increase budgets for both merit and total raises came up lower than they were at this time last year.
On average, company salary increase budgets were projected to be 3.5% for merit increases and 3.9% for total increase budgets, according to Mercer’s latest Compensation Planning Survey. That’s compared to the 3.8% and 4.2%, respectively, that were predicted for 2023.
In addition, surveyed employers reported that they expect to promote 8.7% of the employee population and spend 1.1% of their salary budget in 2024. Compare that to the projections for 2023 of 10.4% of employees promoted and allocations of 1.3% of the salary budget. This suggests your peers are planning to promote a smaller population and using a smaller slice of their budget to do so.
But before locking in your salary increase budget, keep in mind that actual salary increases may surpass projections. According to data from Willis Towers Watson (WTW), the average actual salary increase budget for this year turned out to be 4.4%, which is higher than the 4.1% initially projected for 2023.
What other studies say about salary increase budgeting
Organizations are budgeting an average increase of 4% for next year, WTW’s latest Salary Budget Planning Survey said. It’s also a downward trend from 2023’s projected increases. The survey included responses from 2,090 U.S. businesses.
But here’s a wrinkle: Even though 22% of companies are planning to cut their salary increase budget next year, more than three out of four (78%) U.S. companies said they plan to increase salaries the same amount or more than this year, a survey by Payscale found.
The Payscale study respondents who said their 2024 salary increase budget is expected to be higher, cited these reasons:
- Increased competition for labor or labor supply shortage (65%)
- Change in compensation philosophy or competitive positioning (34%)
- Improved economic conditions or improved business performance (27%)
- Prior year increases were lower than usual (17%), and
- Other (10%).
Those who expected their budget to be lower said it was because of:
- Prior year increases that were higher than usual (77%)
- Concern about future economic conditions or business performance (44%)
- Reduced competition for labor or labor supply surplus (8%)
- Change in compensation philosophy or competitive positioning (4%), and
- Other (4%).
Meanwhile, WTW’s respondents stated this is why salary budget increases are changing:
- Concerns over a tighter labor market impacted by worker shortages (61%)
- Inflationary pressures (60%)
- Changing employee expectations (24%)
- Anticipated recession or weaker financial results (23%), and
- Cost management (20%).
State of the labor market
Speaking of the labor market, if it continues to stabilize as 2023 winds down, that could reduce the pressure on compensation budgets. Job growth, hiring and quit rates are getting closer to pre-pandemic levels.
However, the labor market remains tight. The gap between the number of job openings and unemployed workers is about 2.5 million, compared to when it was a little more than 1 million in the pre-pandemic job market.
The use of pay increases to respond to labor market pressures seems to have slowed down, according to Mercer. But while organizations are using off-cycle increases less frequently, they’re still necessary for counteroffers to retain employees and other equity or market competitiveness concerns.
Recommendations for finance leaders
In a statement on the WTW website, Hatti Johansson, the company’s research director of reward data intelligence, said, “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. This shows that companies are striving to stay competitive in an ever changing work climate. Those companies that have a clear compensation strategy, as well as a pulse on the factors affecting it, will be more successful attracting and retaining employees while keeping pace with an evolving environment in which yesterday’s certainties no longer apply.”
So before finalizing your budget, it’s good strategy to gather and analyze as much market data as you can about your industry and the areas in which you do business, particularly around businesses with a comparable talent pool to yours. Then take that information and assess how it may impact your business and financial outlook, as well as your unique talent and total rewards philosophy.
Enlist HR’s help by scheduling a meeting with your CHRO to break down the salary budget to determine if it’s going to keep pace with what the competition’s probably going to be paying people who are in the same roles at your company.
For additional help to inform your salary increase budget decisions, check out ResourcefulFinancePro‘s on-demand webinar “Modernizing Your Benefits: Competitive Compensation to Attract & Retain Talent.”