Four ways to go beyond budgeting in your compensation strategy 

Organizations are facing a myriad of competing interests when it comes to establishing their compensation strategies. According to recent Mercer research, 91% of US CEOs and CFOs say we are likely to be in a recession in 2023.

Labor shortages reign supreme

When it comes to setting 2023 compensation budgets, labor shortages and attraction and retention concerns remain the number one factor in organization’s decision making. As a result, we are seeing yet again, a peak in compensation budgets since the 2008 financial crisis.  2023 compensation budget projections are now at 3.9% for merit increases and 4.3% for total increases (including merit and other increases to base pay, such as promotion awards or market adjustments). This is up nearly half a point from last year’s increases of 3.4% and 3.8%, respectively.

What can employers do?

Beyond budgeting for increased compensation growth, what more should organizations be doing? We recommend four actions:

  • Tighten compensation governance
    In 2022, organizations spent significantly more on base pay increases for their existing employees than they had budgeted. The rapidly tightening labor market this year forced employers into many reactive off cycle compensation increases. These differences were most pronounced in the hourly workforce, where employers budgeted 3.8% base pay increases for 2022, yet base pay actually increased 6.7% for employees in the same job at the same organization. These reactive increases are not only ripe for pay equity issues, they will also be critical to control in a softening economy. Employers can focus on revamping governance around compensation decisions to ensure compensation budgets remain in check, and pay equity issues are not magnified.
  • Prioritize pay for their hourly and low-income workforce

    Low-income workers are fueling the great resignation, with 45% of employees making less than $60k saying they are considering leaving their employers (as compared to 32% of those making more than $60k). These employees are also the most impacted by inflation, and employee are most concerned about their ability to cover monthly expenses, and nearly 1 in 3 say they’ve taken on additional work to supplement their income.

    Companies have continued to increase their internal minimum wages, with 39% of employers reporting that they have, or are planning to, increase their internal minimum wage. More than 3 out of 4 employers now report an internal minimum wage of $15 or more.

Source: Mercer’s US Compensation Planning Survey – November edition. Internal minimum wage defined as the lowest hourly rate paid to any employee within the organization. Rates were rounded to the nearest whole dollar.
High inflation has resulted in these minimum wages increasingly fall short of living wages, which MIT reports at $24.16. Until this gap is addressed, employers are likely to see continued churn in the labor market and increasing expectations from employees. Our research with clients has shown that proximity of pay levels to the local living wage is a significant predictor of employee retention, relative to other factors. It also matters to all employees – more than 8 in 10 employees at all income levels reported that it was important that their employer clearly and strongly support living wages through internal and external statements and tangible actions. This was more important to employees than any other ESG item. While employers likely cannot close the gap overnight, targeted strategies can be put in place to address.
  • Own your story around compensation
    Whether organizations like it or not, pay transparency is here. Job postings for employees in New York City now include salary ranges, and laws in California and Washington go into effect next year. Several other states such as Colorado and Nevada already have legislation in place. Despite the proliferation of compensation data employees now have access to externally, employers remain hesitant to communicate data internally. Slightly more than half of employers (53%) report that they do not communicate pay structures to employees internally. In the absence of information, employees are going to create their own narrative about compensation – and it may not be a good one. Employers should act now to own their story around compensation.
  • Optimize investments in total rewards

    Of course, pay is only one piece of the puzzle. Employers are continuing to invest beyond pay in total rewards. Should the expected recession in 2023 materialize, optimization of total rewards spend will be critical. Employers can lean in the rewards that employees value most. One potential priority area is flexible working, which behind pay, was the top item employees said would attract them to a new employer.

    With the high potential of a recession, continued high inflation and hot labor market, there are many competing pressure for employers. Employees say pay is the top reason they will join or stay with an employer, so organizations cannot overlook the importance of sound compensation strategies. Setting and managing smart compensation budgets with a particular focus on fast moving segments like hourly pay are sure to help organizations balance these competing dynamics in 2023. 

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