After relatively stable salary increases in Europe and North America (2.7% to 3.0% range since 2010), multiple economic and labor market factors have pushed salary budgets to new levels. The question today is, how long will they stay there?
Tight labor markets, inflationary pressures and employee retention concerns have fueled salary increases to rates not seen in nearly two decades. In 2023, 96% of organizations increased salaries (compared to 63% in 2020) as overall salary increase budgets and total compensation spend reached new heights. And though increases are expected to be down in 2024, they look to remain high, according to data from WTW’s December 2023 Salary Budget Planning Report.
Average actual salary increases hit 5.4% in 2023 as compared to 5.0% in 2022 among organizations in the top 15 economies around the world. However, increase budgets are easing back to around 5.0% in 2024 as compensation and HR professionals adjust to increases that are well above budgets in the prior two decades (around 4.0%).
Higher increases can significantly impact an organization’s total compensation spend. For some, they can represent millions in investment. This makes it critical to have a clear strategy for awarding pay increases as effectively as possible, and that means going beyond a one-size-fits-all approach. Organizations need to differentiate for factors such as location and at-risk or critical talent, and this requires a multi-factor approach that goes beyond pay to optimize total rewards.
In 2023, actual increases remained higher than both actual 2022 increases and initial 2023 projections, according to results from the December Salary Budget Planning Report. In fact, 47% of organizations around the world reported that 2023 salary budgets were higher than their 2022 compensation planning cycle.
The Eurozone, where inflation declined to 2.4% year over year in November 2023, is a reminder that each geography should be viewed individually, as there are notable differences by geography or country and economic conditions continue to remain uncertain.
Budgets in Europe in 2023 were above those in 2022, ranging from 0.8 percentage points higher in Italy and France to 0.6 percentage points in Germany and 0.7 percentage points in Spain. Outside the European Union, the United Kingdom dropped the group at 0.9 percentage points higher in 2023 compared to 2022, with increase budgets of 5.2% in 2023 compared to 4.3% in 2022, which already was well above the 2.8% in 2021 (see Figure 1).
Among organizations that reported higher 2023 actual salary budgets compared to 2022, the most cited reasons for those increased budgets were inflationary pressures (60%) and concerns over a tight labor market (44%).
Conversely, many organizations remain concerned about economic volatility, with 31% of organizations saying they changed their budgets because of anticipated recession or weaker financial results (actual or planned).
In October and November 2023, when the December Salary Budget Planning Survey was fielded, 47% of respondents in the 15 largest economies said their 2023 salary budget increases were higher than 2022 budgets, and 22% said that their budgets were higher than planned early in the year.
It is common for the final increases for the year and plans for the following year to change over time as organizations learn more about the factors affecting increases, such as unemployment, labor supply and demand and so on. However, 2023 saw moderate changes in estimated salary budget increases in the 15 largest economies. As employers finalized their budgets for the year, they stayed around the 5.3% to 5.4% mark.
One of the biggest predictors of future salary budget increases is, in fact, prior increases. Historical data has shown that organizations often are reluctant to make dramatic changes to their budgets. As a result, budgets tend to be more inelastic, often lagging economic trends by 6 to 12 months (see Figure 2).
Labor markets and economic conditions will remain on compensation and HR professionals’ watch lists in 2024, and professionals will need to be flexible enough to act as needed. In July 2023, organizations in the 15 largest economies planned for average increases of 5.0% in 2024, and the December 2023 Salary Budget Planning Report tells a consistent story: Planned increases will stay around an average of 5.0%; however, there are notable differences for some locations.
The planned increase of 5.0% is 0.3 percentage points below the 5.3% actual of 2023, but it is in line with the 5.0% average actual increase granted in 2022. It also is still well above the 4.0% actual increase in 2021. The highest increases planned for 2024 are in:
In Europe, planned 2024 salary increases also are down from 2023 actuals, with increases in the United Kingdom (4.6%), Germany (4.3%), Spain (4.4%) and France (4.0%). The Belgian salary increase of more than 11% in 2023, however this increase was the result of the automatic wage indexation tied to inflation. It is expected to drop to closer to 4.5% in 2024 as inflationary pressures ease.
U.S. organizations are planning an average increase of 4.0% in 2024. Though this number is down from 4.4% in 2023, it is well above 3.1% in 2021 and 3.0% in 2020. The 4.2% in 2022 already represented the highest rate since 2008. It will be interesting to see how various market conditions will impact actual salary budgets in 2024 and projections for 2025 (see Figure 3).
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 2024, they need to balance cost management and affordability with employee attraction and retention challenges. This will be accomplished through multiple actions that must go beyond pay increases alone.
Compensation and HR professionals must align multiple priorities, only one of which is compensation strategy, across the organization’s entire total rewards spend (all of which should be based on sound market data).
Fair pay does not equate to the same pay. Segment your workforce by employee level, performance level or even jobs for which you’re having trouble attracting and retaining talent. The competitive labor market for some jobs is still hot, whether it’s by employee type or industry. In these cases, pay and pay increases are a moving target and the average increases alone are not enough to attract or retain the needed talent. However, if you are looking to raise starting salaries to attract certain jobs, be careful of compression issues that could result when your new hires earn more than your tenured employees.
If your organization doesn’t have much flexibility in its salary budget, explore ways to employ your budget more strategically in the coming year. One way is by targeting specific employee groups, like lower paid groups where a smaller portion of the budget will make the greatest impact. For higher paid levels, focus more on other pay elements like discretionary bonuses or long-term incentives.
Many organizations already are thinking about how to target or segment their budgets by employee level. For example, in the United States data from the December Salary Budget Planning Report shows the 2023 salary increase budgets and 2024 plans for executives are in line with overall salary increases. However, upon closer analysis, when comparing executive increases to production and manual labor levels, 79% of executives received a lower salary increase percentage than production and manual labor. Additionally, 5% of organizations granted 0% increases to executives.
More recently, unions have been on the winning side of pay-increase demands, and most are getting above-market increases as they use inflationary pressures and rising pricing to emphasize worker inequality. Those organizations that aren’t proactive about how they reward lower paid or hourly workers in the coming cycle may struggle to keep the talent they need and could even be faced with their own increased union activity.
When it comes to modern compensation programs and practices, one size doesn’t fit all. Rather than trying to apply a single global plan, for example, consider grouping countries based on their economies, labor market conditions, or even more centralized negotiations or mandatory indexation. 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 places where inflation remains relatively low (e.g., Middle East, Asia) or where inflation is coming down from historically high levels (e.g., U.S., UK), salary increases may be above inflation. Locations with centralized union negotiations (e.g., Germany, Spain) or mandatory indexation (e.g., Belgium), salary increases will have to follow guidelines.
Areas that are experiencing hyperinflation of 50% or more (e.g., Argentina, Turkey) 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.
Pay is important, but it’s not everything. High performing organizations must consider the fundamentals of the employee experience and understand what employees are looking for from work that extends beyond their compensation.
Every year, WTW surveys more than 500 companies representing nearly 10 million employees. Multiply our database, which reflects nearly 50 years of research, and that equates to insights from nearly a quarter of a billion employees that tap into all aspects of employee experience. We have learned that, because most organizations are focused on compensation, goal setting and organizing work, employees’ experience of workplace fundamentals does not vary greatly from one organization to the next (see Figure 4). These fundamentals are critical, and organizations must get them right.
A strong sense of purpose, doing great work in a thriving organization, connections with great people and leaders, and individual growth and rewards are fundamental to the employee experience. These are important for creating workforce connection and contribution, and they have to be done right.
Pay transparency, pay equity and the ability for employees to research data online from job posts, it is more important than ever to educate both managers and employees about the fundamentals of pay. They need to see beyond salary increases to other actions that have an impact on the overall employee experience.
While base salary represents one of the largest fixed labor costs for employers, there’s a compounding effect that must be acknowledged and managed intelligently. Compensation and HR professionals need to educate employees about the overall compensation strategy while at the same time highlighting and communicating the full arsenal of rewards.
The ability to have open and clear communication requires organizations to have their compensation philosophy and strategy in place. If an employee finds a different pay rate through online search and you find yourself in a position of needing to justify why certain jobs at certain levels are paid differently, your entire job architecture and leveling must be very structured. In turn, that leads to defensible pay programs.
Ongoing economic and geopolitical uncertainties combined with an increased focus on pay transparency and the employee experience make it important for compensation and HR professionals to have a plan. 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. But you can start with reliable market data that supports the critical – and defensible decisions – you will make in the coming year.