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, salary increases continue to move differently than inflation under changing economic conditions. With inflation now dropping in the U.S., it is possible that salary budgets could return to exceeding inflation in 2023 (which was the case in the low-inflation years from 2007 to 2020) or remain short of it (which was the case in high-inflation years such as 1979, 1980, 2021 and 2022).
Understanding the numbers
According to WTW’s Salary Budget Planning Report, a survey of U.S. companies conducted in early 2022, employers were budgeting an overall average salary increase of 3.4%, which was less than half the then-current inflation rate of 7.9%. At year-end, another WTW survey reported the average U.S. salary increase grew to 4.2%, but still a third below the 2022 U.S. inflation rate of 6.4%.
As U.S. inflation trends downward in 2023, the projected average total salary increase has risen to 4.6%. Given these trends, it is unknown whether salary increases will outpace inflation, be similar or be lower this year.
With thanks to WTW’s Lori Wisper, who provided additional analysis in her recent article, Recession, layoffs, inflation, worker shortages: What it all means for 2023 pay increases, several factors continue to account for the difference:
Actions for leading through volatility
Effective leaders manage through multiple volatile business cycles by remaining competitive while keeping an eye on increasing fixed costs that could leave them no choice but to lay off valued employees during downturns. They are careful about who they offer salary increases to, offer more flexible bonus, stock and employee benefit plans, and 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 May 17, 2023.
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