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Will pay increases exceed inflation in 2024?

By John M. Bremen | December 21, 2023

Effective leaders work to avoid driving up fixed pay costs by focusing on employee experience as well as benefits flexibility and access.
Work Transformation|Health and Benefits|Employee Experience|Benessere integrato

Even as inflation slows at the end of 2023, planned salary increases for 2024 remain higher than average over the past 20 years. Employers continue to cite inflationary pressures and concerns over a tight labor market as the primary influencing factors behind salary increase budgets.

In April 2022, I covered why – despite severe talent shortages and the ongoing impact of the Great Resignation – corporate salary increase budgets trailed inflation and why salary increases move differently from inflation. A year later, in mid-2023, salary increases continued to move differently than inflation under changing economic conditions, with salary increases potentially again exceeding inflation for the first time since 2020 (and in a manner keeping with most years of the past two decades).

As it turns out, data from a new WTW survey and updates from the U.S. Bureau of Labor Statistics (BLS) report that salary increases did indeed exceed inflation in 2023 and likely will do so even more in 2024.

In the WTW survey, U.S. employers reported an actual average salary increase of 4.4% in 2023, during a year when BLS reported annual inflation of 3.1%. The survey also reports U.S. employers are planning an overall average salary increase of 4.0% for 2024, in contrast to many economists predicting lower U.S. inflation in 2024 (in many cases below 3%). Salary increases and inflation vary considerably by country, but this general trend is occurring in many (but not all) countries.

Why inflation and salary increases are not the same

With thanks to analysis by WTW’s Lori Wisper, several factors account for the difference between salary increases and inflation. While inflation and salary increases generally move in the same direction, influencing each other, they are driven by different inputs:

  • Inflation is defined by changes in the cost of a market basket of goods (such as housing, groceries and fuel).
  • Pay on the other hand, is driven by changes to supply/demand for labor, which can be caused by demographic trends, labor participation rates, unemployment levels, technological advances and growth in productivity.

For example, in 1979 – the year of the highest peacetime inflation on record – U.S. inflation was 13.3% but wage increases were a much lower 8.7%. Conversely, U.S. inflation was 1.9% in 2001, but salary increase budgets were much higher – near 4% – in 2001 and 2002. This difference tends to make employees feel advantaged in terms of real spending during low-inflation years and disadvantaged during high-inflation years.

Independent of inflation, pay increases generally are expected to remain high as long as unemployment remains low.

Actions of effective leaders

With thanks to WTW’s Hatti Johansson, effective leaders seek to strike a healthy balance through the following actions in 2024:

  1. 01

    Supplement pay with nonmonetary elements

    Effective leaders use nonmonetary actions to attract and retain employees. At most organizations these include more workplace flexibility (63%), broader emphasis on diversity, equity and inclusion (60%), and improving the employee experience (55%).

    For example, organizations report moving toward greater work flexibility, as over half (55%) of employers offer a choice of remote, onsite or hybrid working, while 31% offer a flexible work schedule. As this trend grows, many companies are changing programs and resources to be more in line with remote working.

  2. 02

    Focus on employee benefits

    Effective leaders understand that employees deeply value employee benefits such as healthcare and retirement and that their costs continue to increase as they enter 2024. Approximately half of organizations in the survey have made changes to health and wellbeing benefits, and another 19% plan to do so.

    Employees value access to benefits as well as flexibility in their design, and companies can offer programs that are tailored to the needs and preferences of their workforces. Employee benefit costs went up materially in aggregate in 2020, 2021, 2022 and 2023. But these costs are not captured in salary increase budgets.

    Effective leaders look at pay and benefits holistically and develop programs that help attract and retain their talent while managing costs.

  3. 03

    Increase pay transparency and effectiveness

    According to a recent WTW pay transparency survey, approximately 80% of respondents already are communicating pay program information to employees. Over a quarter are communicating or planning to communicate pay rate or pay range information regardless of regulatory requirements.

    Two-thirds are communicating or considering communicating a narrative about pay equity outside the organization. Further, effective leaders are changing specific programs such as base salary, short-term incentives (such as annual bonuses or sales compensation plans) and long-term incentives (such as stock programs). They also are putting in place new job designs and career programs to support their transparency objectives. These actions reflect that leaders are using investment in pay more strategically to attract and retain key talent as well as efforts to achieve greater pay transparency.

Effective leaders carefully balance spending and program design considering both ongoing inflation concerns and long-term talent shortages. Wherever possible, they work to create strong culture and employee experiences, developing great places to work instead of driving up fixed pay costs.

A version of this article originally appeared on Forbes on December 14, 2023.


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