Salary budget increases have remained relatively stable (arguably stagnant) in the past decade. Salary increases in Europe and North America have stayed in the 2.7% to 3.0% range since 2010, leaving employers and employees alike to wonder when something would change. Then change arrived with a vengeance in 2022.
Tight labor markets, inflationary pressures and employee retention concerns fueled salary increases to rates not seen in nearly two decades. Not only did 96% of organizations increase salaries in 2022 (vs. 63% in 2020), overall salary increase budgets and total compensation spend also rose to new levels, according to data in WTW’s December 2022 Salary Budget Planning (SBP) Report.
Average actual salary increases hit 5.0% percent in 2022 as compared to 4.0% in 2021 among organizations in the top 15 largest economies in the world. And projections from the report show that compensation and HR professionals are expecting even higher increases in 2023.
Even the 1.0% jump we saw from 2021 to 2022 is significant in terms of organizations’ total spend on compensation. For some companies, that kind of increase represents millions in investment. This makes it more critical for organizations to have a clear strategy for awarding pay increases as effectively as possible. It also means going beyond a one-size-fits-all approach to pay increases and calls for differentiation among countries, at-risk or critical talent, representing a multi-factor approach that goes beyond pay to optimize total rewards.
Participants in the December Salary Budget Planning Survey pushed their 2022 actual increases notably higher than both actual 2021 increases and initial 2022 projections. In fact, 67% of organizations reported increasing their total compensation spend in 2022 as compared to 2021.
56% of organizations around the world reported that 2022 salary budgets were higher than their 2021 compensation planning cycle.
Looking across the Eurozone, where inflation exceeded 10.6% on average in October 2022, it is a reminder that each country should be viewed individually, as there are notable differences in year-on-year increases.
Budgets in 2022 compared to 2021 ranged from 0.8 percentage points higher in Italy to 1.1 percentage points in Germany, to 1.4 percentage points in Spain. Following its recent withdrawal from the European Union, the United Kingdom topped the group at 1.5 percentage points higher in 2022 compared to 2021, with increase budgets of 4.3% in 2022 compared to 2.8% in 2021.
Among organizations that reported higher 2022 actual salary budgets compared to 2021, the most cited reasons for those increased budgets were:
In October and November 2022, when the December SBP survey was fielded, 45% of respondents in the 15 largest economies said their salary budget increases were higher than projections just a few months earlier in July.
While it is common for the final increases for the year and projections for the following year to change over time as organizations learn more about the factors affecting increases (e.g., unemployment, supply and demand of labor), the change typically is not this dramatic. We saw only moderate changes in 2021 salary budget projections when employers were planning for 2022. However, considering that changes in salary budgets often lag economic trends by 6 to 12 months, it appears that we are now seeing salary budgets catch up with labor market dynamics.
In 2023, compensation and HR professionals will need to continually monitor labor markets and economic conditions – and be flexible enough to act quickly when needed. In July 2022, organizations in the 15 largest economies projected increases of 4.6% in 2023, however the December 2022 SBP tells a different story, with 2023 projections closer to 5.5%. That’s almost a full percentage point higher.
And in the 15 largest economies, that 2023 projection is 1.5 percentage points higher than the 4.0% actual increase in 2021 and the 5.0% average actual increase granted in 2022. The highest increases forecasted are in India (10.0%), Russia (8.6%), Brazil (7.5%), Mexico (6.4%) and China (6.0%). Please note that the data is from multinational organizations with operations in Russia; data from local Russian organizations was not collected in 2022.
In Europe, projections for 2023 salary increases are also well above 2022 actuals with the highest increases in Belgium (10.5%), the United Kingdom (5.1%), Germany (4.6%) and Spain (3.6%). The jump in the Belgian salary increase is due to the automatic wage indexation tied to inflation, which is unique from the rest of the eurozone.
The United States is projecting an average increase of 4.6% in 2023, which is above the 2022 average actual increase of 4.2% – the highest since 2008 – and higher than 3.1% in 2021 and 3% in 2020. It will be interesting to observe whether these nations are, in fact, able to maintain these levels.
To address ongoing challenges, organizations are deciding how to focus their compensation spend for the greatest impact. Though employees want higher wages to mitigate the cost of living, as organizations prepare for 2023 they need to balance cost management with employee attraction and retention efforts by taking multiple actions to keep employees – and those actions must go beyond pay increases alone.
With more money at play than has been the case in nearly 20 years, it is critical to align your priorities to the salary increase budget you establish (which, of course, should be based on sound market data). Ensure your salary increase process is transparent and emphasizes the connection between salary increases and business performance. It’s easy to forget that several factors drive salary increase budgets and, as such, those factors should be viewed as one piece of a much larger pie.
Remember that a one-size-fits-all approach won’t work. For example, instead of trying to apply a single global plan, group countries based on their economic, labor market conditions, or statutory requirements (e.g., mandatory indexation, collective bargaining). Salary increases rarely match sudden increases in inflation, and the time horizon or duration of inflation or labor market shortages affects decisions in uncertain times.
For example, in regions where inflation remains relatively low (e.g., Middle East, Asia), salary increases may remain above inflation. While countries where there is centralized union negotiations (e.g., Germany, Spain) or mandatory indexation (e.g. Belgium), your salary increases will need to follow the guidelines. In countries that are experiencing historically high inflation (e.g., U.S., UK), in addition to higher salary budgets that may still lag inflation, organizations may need more creative solutions, such as targeting by talent segment or offering one-time cost-of-living adjustments.
The group of hyper-inflation countries (e.g., Argentina, Turkey) experiencing hyperinflation of 30% or more are in a different category altogether. In these cases, organizations are taking a range of actions, including more frequent pay increases, cost-of-living adjustments and even linking salaries and/or bonus payments to foreign currencies.
Remember to segment your workforce, for example by employee level (e.g., hourly, professional, executive), performance level or jobs in which you’re having trouble attracting and retaining talent.
Perhaps you want to retain critical talent and resolve inequity issues. If so, then focus your actions on leveraging salary budgets to adjust any major diversity, equity and inclusion issues (including a fair pay analysis) and prioritizing in-demand and business-critical talent. You could consider one-time payments for lower-level or lower paid employees like production workers, or targeted base salary increases or retention or recognition awards for critical or at-risk talent.
It is important to take a total rewards perspective. Base salary adjustments are one piece of the employee value proposition. Consider other important components of the employer-employee deal including:
Your actions can range from improving the employee experience to placing a broad emphasis on diversity, equity and inclusion initiatives or implementing greater workplace flexibility. Or perhaps you need a more targeted approach to retain specific employee groups by offering retention bonuses or spot award – or adjusting salary ranges more aggressively. Long story short, prioritizing and segmenting rewards actions will be vital for an appropriate return on investment.
Finally, it will be more important than ever to educate both managers and employees on cost of living and inflation versus the cost of labor. You will need to make it a point to help them see beyond salary increases to other actions that have an impact on the workforce.
As noted, base salary represents one of the largest fixed labor costs for employers, and salary increases have a compounding effect on fixed costs over time that must be managed intelligently. This makes it important for employers to highlight and communicate the full arsenal of rewards.
While it’s true that employees’ buying power is diminished when salary increases are lower than inflation, remember that pay never goes down – even when inflation goes down. In the end, if employees raise “real-time data” they find online to show they are getting a pay cut because your salary increases don’t match inflation, you have some work to do to educate them about basic economics and labor markets. Don’t underestimate the importance of this education and communication effort.
Given ongoing uncertainties and the growing threat of a recession, it is important for compensation and HR professionals to thoughtfully balance the demand for higher salaries to address inflationary pressures and labor market challenges against the risk of increased and permanent cost structures.
There are growing concerns that a recession is unavoidable. However, the duration and scale are unknown. Even with ongoing pressures, organizations must stay levelheaded and take a conservative approach that aligns with market conditions and is directed by clear business priorities. After all, you can’t respond to everything happening in the market, all at once. The best place to start? With reliable market data that supports the critical – and defensible – decisions you must make.