The term “strategic” and the concept of salary increase administration typically do not go together. For decades, HR and compensation professionals would dole out base pay increases in the same, traditional manner: Divide the salary budget evenly by headcount, go through the “pay for performance” process and, in the end, most employees would get the same increase … which would be virtually the same as the salary budget number.
From 2009 to 2022, the average U.S. salary budget hovered around 3%, and that also happened to be the increase that most employees expected (and typically received). During that same time, inflation was low and GDP growth was steady. Doing anything radically different with salary increases than we’d always done wasn’t really discussed, much less considered. Some would argue it was unnecessary. The process worked, everyone who should have got paid did … If it ain’t broke, why fix it, right?
However, in the past three years salary increase season has felt anything but stable for most HR and compensation professionals. It’s either been a constant guessing game of “when will salary increase budgets go beyond 3%?” (fond memories of 2021) or “when will they go down below 4%?” (2022 and 2023). It’s also been a steady drumbeat of explaining why salary increase budgets don’t match inflation – a theme that shouted at us from traditional news outlets to social media outlets to employees and even leadership.
With the U.S. economy and labor market starting to feel more like they did pre-pandemic, this year’s salary budget planning season is starting to feel more like “business as usual,” which tempts us to go on autopilot and administer pay increases just as we’ve always done. Don’t be tempted!
Erasing the last three years will mean missing a golden opportunity to use the coming salary increase planning process strategically. Optimize your organization’s spend and turn on the power of pay programs to get the greatest return on these monies. The word “strategy” is rarely used to describe the salary increase planning process but, yes, that’s exactly what is described here: How can you use your salary budget strategically? And why is it more important than ever before?
Last year likely will go down as one of the most confusing to gauge economically, with the start of the year still telling of recession predictions, inflation still relatively high, and layoffs happening in some big-name companies. Those predictions proved wrong, with GDP continuing to exceed expectations at a 4.9% annualized pace in the third quarter, and inflation getting closer to historically lower levels (even if it isn’t quite as low as the Federal Reserve Bank would like). It appears that the elusive “soft landing” of recession avoidance is happening. Given the chaos of the year, there are still some things to consider as you think about how to use your salary increase spend strategically.
While the job market has slowed recently, it is still very healthy with 300,000 new jobs created in September, 150,000 new jobs created in October, 199,000 jobs created in November, and a whopping 216,000 jobs created in December. While these numbers are down from the highs of 2021 and 2022, 150,000 jobs created in a month is the pace the U.S. frequently saw prior to 2020, and it still provides enough employment to keep the unemployment rate relatively low and the quit rate fairly stable.
The bottom line is, there are still plenty of jobs available, with about 8.7 million job openings in October and only 6.5 million unemployed Americans seeking working during that same time. That gap has narrowed significantly in the past two and a half years but is still slightly above pre-pandemic levels and still a gap. We can safely say we are no longer in the "Great Resignation," yet attraction and retention challenges remain, particularly in certain jobs and at certain organization levels.
It’s true that the employment picture drives salary budgets most directly, but so can employee expectations and employer affordability. Many of you are likely still getting questions about inflation; not about the rate itself being high, but about the fact that the cost of living remains high.
While this is, no doubt, true for many people, U.S. consumer spending is what actually propelled the economy in 2023, with consumer spending growth accounting for more than two-thirds of U.S. economic activity. So, while the prices in a market-basket of goods (with housing, energy and food being the biggest-ticket items) remain elevated compared to 2022, it isn’t stopping Americans from purchasing. That’s also because we’re earning more money than ever to fuel those purchases.
U.S. inflation in December 2023 was 3.4% and, according to WTW’s December 2023 Global Salary Budget Planning Report, average salary increases in 2023 were 4.4%. While the 2024 projection of 4.0% is lower, it is still higher than the 3% we saw for more than a decade prior to 2022. Employees who still want their employer to match salary increases to inflation would get less than the going rate – which is the best illustration yet for why salary increases shouldn’t be directly linked to inflation.
As the labor market and inflation stabilize, the current labor climate is anything but stable. For the first time in decades, labor unions launched strikes with some of the nation’s largest and most powerful companies – and won great concessions at the bargaining table, especially in the form of pay increases. From the auto industry to Hollywood, from healthcare workers to bartenders, workers went on strike in greater numbers in 2023 than the U.S. had seen in decades.
The renewed power of unions has meant gains not only for unionized workers. Many nonunion employers also are considering pay increases to ensure they stay nonunionized. Even those organizations or industries that traditionally have not had union activity or even the threat of them are paying attention to gains in pay and other concessions to compete for talent in what has been an increasingly dynamic hourly labor market.
This article started by proclaiming that 2024 is the year to do salary increases differently, more strategically, even if the fairly stable economic conditions are lulling you into thinking you can get by the same way you always have. When we say to take a strategic approach, we mean: Don’t just use headcount to distribute the budget. Use an investment strategy approach instead of spreading your salary increase budget evenly like peanut butter on bread. Ask yourself:
If your answer is “pay for performance,” you aren’t thinking strategically, you’re thinking historically. Here are examples of what strategic salary planning looks like.
If talent retention is your investment goal, use part of your salary budget to correct for base salary compression. Compression happens when you hire new employees at equivalent or higher pay levels than current employees in the same role. Many organizations experienced this to a great degree during the Great Resignation. In fact, the December Salary Budget Planning Report found that 55% of U.S. respondents were still hiring people higher in their relevant salary ranges.
Using part of your salary budget to strategically invest in talent retention means identifying where the need for these corrections is greatest and providing salary increase budgets that reflect the different needs of different employee groups. This is not based on headcount, but on investment priorities. And, while most HR and compensation professionals use overall position in range (i.e., actual pay relative to midpoint) to guide salary decisions, relative position in range (i.e., actual pay compared to others in the same range/job) is a better gauge for judging retention risk. It also is better for deciding how to use salary increases to correct for salary compression.
Using this same logic, some organizations also may start questioning whether it’s the best use of their limited salary budget to provide increases to all newly hired employees. If employees were brought in high in the range, perhaps the salary administration guidelines result in a small or even no increase. If that is the case, this should be reflected in the salary budget provided to their leaders. If the salary administration guidelines do allow for new employees to receive increases, especially those brought in high in the range, it’s time for a new set of guidelines!
Consider how organizations have always distributed salary increase. It’s been either the same to all levels of employees and types of jobs, or more to executives and less to hourly workers (an historic practice that has likely emboldened the unions).
Do executives really need 4% salary increases to keep pay competitive when, generally, organizations carefully monitor the overall competitiveness of executive pay and adjust as needed? And let’s not forget that executive retention and performance are primarily addressed through incentive pay, which begs the question about the purpose of an annual increase for them.
More importantly, do newly hired executives need an increase to base salary at all? As mentioned for new employees, providing increases for newly hired executives should be discussed, especially because there has been so much turnover at the leadership level in the past two years. Would those monies be better spent at the bottom of the organization, where the risk of unions looms large or the need to increase hourly pay would be a boon to stemming turnover?
While the U.S. data in the Salary Budget Planning Report shows the 2023 salary increase budgets and 2024 plans for executives to be in line with the overall salary increase median of 4%, a closer look at the results revealed:
Maybe this question of whether to use limited salary budget dollars for annual executive increases is starting to germinate?
Pay disclosure laws and regulations are sweeping the globe, and in WTW’s 2023 Pay Transparency Survey, 81% of U.S. companies (and 73% of global companies) reported that these growing regulatory requirements are encouraging increased levels of pay communication. Even more to the point, current and prospective employees expect organizations to be more transparent. According to the 2023 Adobe Future Workforce Study, “85% of recent U.S. post-secondary graduates reported they are ‘less likely to apply for a job if the company does not disclose the salary range in the job posting.’”
If you are already on the road to making pay more transparent, make sure to align the salary increase process to build on your momentum. If you haven’t started down the pay transparency road, think about how you can use the salary increase process to jumpstart your efforts to be more transparent. Either way:
Don’t let others control the narrative. Labor unions were so successful in 2023 because organizations let them control the narrative about how employers treat employees. Even in organizations without labor unions, social media platforms have been known to impact an employer’s image.
Every organization has an employee value proposition or brand; is yours the one you intended or is it being shaped by others? Use your ability to administer salary increases differently – more strategically – as the start of taking back the messaging.
The desire to let this year’s salary planning cycle drive a back-to-the-future mindset is tempting, but don’t let this golden opportunity to take a strategic approach to your salary increase process slip by. This is your chance to effectively position your organization for the next, inevitable set of labor market challenges.
