Facing ongoing change in 2021, organizations around the world were forced to continually adapt and be resilient. Yet, while uncertainty was the word of the year (thankfully nudging out 2020’s “unprecedented”), one thing was clear: Labor market pressures stemming from the pandemic had a significant impact on how organizations finalized their 2022 pay budgets. Focused on tighter labor markets and the need to attract and retain talent, more than 80% of organizations globally held their regular salary review cycle in 2021 (compared to 63% in 2020), with budgets increased over prior years.
Looking at 2022, greater scrutiny on the labor market will continue among both employers and employees. Results from our latest Salary Budget Planning Survey suggest that 96% of companies globally will increase salaries. Among organizations that are planning to grant increases, average salary increases of 4.3% are forecasted (vs. 4.0% actual increases in 2021) for the top 15 economies in the world.
As labor markets tighten and inflation rises in certain countries, all eyes are on salary budgets and, so far, they seem to be inching above prior years. But increased salary budgets only make it more critical for organizations to have a clear strategy for awarding pay increases as effectively as possible, prioritize critical employees and hot jobs, and differentiate for performance.
2021 salary budgets aligned with 2020
Employers looked to 2021 with optimism and an eye toward recovery, but many organizations around the world had to adjust to tumultuous business conditions that emerged from the pandemic. 2021 salary increases were notably softer than initially expected, with most markets dialing down their original forecasts to be more in line or slightly below 2020 salary budgets.
Most organizations in the 15 largest economies experienced a dip in 2021 compared to their 2020 actual budgets, increasing their salary budgets by an average of 4.0% among those granting increases. This is noteworthy, as it is above 2020’s increase of 3.8%. Of the 15 largest economies, 10 countries had increases in 2021 that were in line or just (on average 0.1 percentage points) below those in 2020. Only Australia, India, Italy, United States and Brazil saw average increase budgets in 2021 above those in 2020.
Organizations in smaller economies shared a similar fate, mostly averaging similar salary budgets in 2021 when compared to 2020. However, rising inflation in Argentina and Venezuela made these countries the exceptions to the rule, with increases of 7.3 and 279.9 percentage points higher in 2021 vs. 2020.
Organizations have had to adjust their projections as global labor market challenges have unfolded. For more countries, budgets for the upcoming cycle have changed from increases projected earlier in 2020. While 44% of organizations reported not changing their projections from earlier in the year, almost 1 out of 4 (23%) reported that their 2022 projections are higher now than anticipated earlier in 2021.
Of the organizations that reported higher 2022 projections at the end of the year, the average total increase was about 3.7% (compared to 2.9% for 2021 for the same group of companies). The most cited reasons for the higher projections were:
- Concerns over a tight labor market (63%)
- Concerns related to cost management, such as inflation or rising cost of supplies (48%)
- Anticipated stronger financial results, actual or forecasted (43%)
What to expect in 2022
Resilience tempered with cautious optimism will be the 2022 mantra for employers, with most looking to increase salaries and provide bonuses for employees – particularly for critical or high-performing talent. Being adaptable to ongoing market-condition changes is never easy, but indications show that employers are returning to a more-normal salary review cycle in 2022. They also are looking at how to focus their salary budgets for the greatest impact, with 2022 projections showing that 96% of companies globally will increase salaries and far fewer will implement salary freezes than in 2021 or 2020.
Increased budgets are evident across most of the world’s largest economies. The 15 largest economies in the world are forecasting an average increase of 4.3%, which is 3 percentage points higher than the actual increase of 4.0% in 2021. The exception is Brazil, which is projecting a 6.2% salary budget increase in 2022 compared to 7.1% in 2021.
Organizations in France, Russia, India and South Korea are all forecasting salary increase budgets that are more than half a percentage point higher in 2022 compared to the prior year. These are followed by Germany, Spain, United Kingdom, China, Canada and Mexico, which have a projection of 4 percentage points higher in 2022 compared to 2021. The United States is projecting an average increase of 3.4% compared to 3.1% in 2021 and 3% in 2020, which is the highest since 2008. It will be interesting to observe whether these nations are, in fact, able to maintain these levels.
While the optimism shown by different countries comes with hints of caution, 2022 will likely be a better year for salary increases. Prioritizing and segmenting increases is vital to ensure an appropriate return on investment.
Set a clear strategy for 2022 salary increases
After establishing your increases budget based on market data intelligence, it is critical to align your priorities. The question boils down to, “What am I trying to achieve with these salary increases?” This sounds simple; however, a clear answer is not always easy.
After determining your strategic goals, you can start narrowing down how to achieve those goals by setting priorities. For example, one goal may be to retain critical roles and resolve any possible inequity issues. If so, then your priorities would be to adjust any major diversity, equity and inclusion issues using salary budgets – even some fair pay analytics – and consider in-demand and business-critical talent. But it’s important to remember that every organization will have its own set of goals and unique priorities.
One common theme to remember: Even with an increased budget, it is important to segment your workforce as you consider your goals. Consider segmenting by employee level (e.g., hourly, professional, executive), performance level or even by areas in which you’re having trouble attracting and retaining (e.g., digital talent).
Also, make sure you take a Total Rewards perspective. Don’t just focus on base salary adjustments. Consider other important components of your Total Rewards package, including bonuses, long-term incentives, health and wellness benefits — even career progression and learning and development opportunities.
Finally, consider other payments you may have made during the year, like retention bonuses or recognition awards. Taking a holistic view will ensure your salary increase process is transparent and emphasizes the connection between salary increases and business performance. It’s easy to forget that salary increase budgets are driven by several factors and, as such, should be viewed as one piece of a larger picture.
When it comes to salary budgets, be ready for anything
2021 was another year of change, with tightening labor markets pushing salary increases around the world. 2022 will see salaries and other aspects of life return to some sense of normality and more companies implementing regular salary reviews and higher increases than in 2021. Yet, salary increases still will need to be allocated in line with market conditions and influenced by clear business priorities. Market data provides a good start for navigating the year ahead.
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