Inflation rates and resignation rates have been high in 2021 and 2022. In fact, both economic factors have been running at levels not seen since the inflation era of the 1970s. Many employers were caught off guard by how many employees began to quit last year, and the pace of quitting has only slightly slowed during 2022. Additionally, organizations have been experiencing the peak of Baby Boomer retirement during this period.
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Because the Great Resignation has taken place during a historically tight labor market, hiring competition has been fierce. Most employers found they must offer higher wages to attract qualified talent. So, what’s ahead for 2023? Will further wage increases be necessary?
In this article, we will look at 2023 salary projections, explore the relationship between wages and employee retention, and discuss how to conduct a salary review.
The Relationship Between Wages and Retention
With the rising cost of everything from gas to food to rent, most employees agree they need to earn more money. Similarly, a survey by The US Conference Board revealed “62% of workers worry their paychecks won’t keep up with inflation.” To keep pace with inflation, employees would need to earn about 8% more in 2022 than they did in 2021.
Unfortunately, employees often must leave their current job for another employer in order to gain a significant increase in salary. For instance, The US Conference Board Survey revealed, “of those workers who changed jobs during the pandemic, nearly one third received a new salary that was 30% higher than their previous pay.” The same survey showed an additional 20% received a 10-20% pay increase by switching employers.
Data from Pew Research also highlights the pay gap between workers who stay and those who leave. Unfortunately, loyal employees are falling behind financially, compared to those who jump between jobs. Pew Research found that from April 2021 to March 2022, “60% of employees who changed employers saw a real year-over-year wage increase (after inflation); however, only 47% of employees who stayed enjoyed real wage gains.”
The search for better wages isn’t the only factor causing employee turnover, but it is the most important factor. According to Randstad research, “62% of employees claim the most appealing factor about an employer is salary and benefits.” Culture, flexible work, opportunities for advancement and learning, recognition, and good managers are also powerful drivers of retention. However, these factors cannot make up for salaries that are too low.
Survey Reveals Employers’ Compensation Plans for 2023
Willis Towers Watson recently surveyed 1,430 employers about their compensation planning for 2023 and found that companies are planning the largest increase in wages in 15 years. As reported in Human Resource Executive, “companies, on average, are budgeting a 4.1% salary increase for 2023. That’s on top of 2021 raises, which averaged 4%.”
Many businesses plan to give higher pay raises than last year. The same HR Executive report showed “41% of employers have increased their 2023 salary budgets more as the year has progressed—raising planned wages above their original projects.”
Additionally, U.S. businesses are adjusting salaries more often. While roughly half of companies globally stopped their salary review cycle during the pandemic, Willis Towers Watson found “36% of employers now plan to increase how often they raise salaries. Additionally, 69% of employers have increased workplace flexibility, and this can help employees save money on commuting costs in addition to helping with work/life balance.”
How to Conduct a Salary Review
Salary review is the best way to ensure your wages are keeping up with competitors’ and incentivizing retention of your best employees. SHRM suggests “as a general rule, employers should examine salary structure at least every three to five years,” but notes “some HR executives favor conducting an analysis every 18 to 24 months.” Some companies are even considering semi-annual salary reviews.
Here are some tips for conducting an effective salary review:
Analyze your compensation bands. Start by comparing your current salary ranges with your industry, your top competitors, and the overall marketplace (especially if your business is vulnerable to losing employees to other industries). If you are already paying below industry or market rates, you may need to adjust salaries more in order to achieve recruiting success and good retention levels. You might be competitive in some positions but need adjustments in others.
Review your budget and objectives. What can the company afford for total employee salaries? Is there enough room for increases across the board, or will you need to select only top performers for a raise? How can you best apply the budget you have toward meeting the workforce objectives of the organization? A budget evaluation can help determine your company’s next move.
Consult front-line managers. Direct supervisors often have a better feel for employee expectations when it comes to salary. They hear the complaints when pay is too low, and they know when they are having trouble keeping certain types of positions filled.
Communicate with employees. It is very important to have a clearly understood, bias-free system for reviewing the performance of employees. Whether you perform annual reviews or have a system of continuous feedback, em
ployees need to be able to connect their performance results to their salary increases. Additionally, you should tell employees when you perform comparative salary analysis, so they know the organization is staying on top of industry and market compensation trends. Finally, acknowledge the current economic strains on your workforce and try to find extra ways to help employees cope with inflation.
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