2023 Forecasted Compensation Trends: Will it be Another Wild Year?

As the remaining chapters of 2022 come to a close, we anxiously await what 2023's pages hold. Economists, analysts, and pundits have been predicting since the second quarter of 2022, but what can we expect for the upcoming year? If the past 12 months have revealed anything about compensation trends, it is that 2023 will continue to be a wild ride. Here's what we know so far.

Inflation

Although consumer inflation in the U.S. appears to be slowing, employee pay raises continue to trail rising costs. On November 10, The U.S. Bureau of Labor Statistics (BLS) reported the Consumer Price Index (CPI) for all items rose 7.7 percent (prior to seasonal adjustments) for the 12 months ending in October, making it the smallest 12-month increase since January 2022. This was a slight dip from the 8.2 percent for the 12-month period ending in September and a noteworthy decline from the 9.1 percent for the period ending in June. While this is an encouraging sign, inflation remains significantly above the average 3.8 percent per year rate seen from 1960 to 2021.

Economists at JPMorgan expect the CPI to ease to a year-over-year pace of 3.2 percent by September 2023, down from the 8.2 percent seen this past September. Similarly, core inflation (excluding volatile food and energy prices) is predicted to drop from its current 6.6 percent year-over-year rate to 3.4 percent year-over-year by next year. But what does this mean for employee salary projections?

Budgets and Pay Practices

According to Mercer’s 2023 US Compensation Planning Survey, U.S. employers are budgeting an average of 3.8 percent for merit increases and 4.2 percent for their total increase budget. As per the Pacific Northwest, the 2022/2023 Salary Budget Survey Regional Report – Oregon and SW Washington highlighted the region as currently paying slightly higher than other parts of the country and is projecting an average 5.1 percent pay increase for 2023. Pending your data source of choice, the average percentage budgeted by employers for 2023 salary increases vary somewhere between 3 – 5 percent.  What can be agreed upon is that salaries are likely to increase throughout the new year amid labor shortages but will continue to lag inflation. To keep things in perspective, the projected 3.8 percent average merit increase reported by Mercer is roughly half of the current annual inflation rate of 7.7 percent. To combat employee dissatisfaction and turnover, The National Business Trends Survey from the Employer Associations of America (EAA) reported the top strategies by executives are adjusting pay ranges, focusing on existing staff retention in jobs where recruitment is difficult, and focusing on existing staff receiving additional training/development.

Labor Shortages, Hiring, and Layoffs

A recent CNN Business report reflected U.S. unemployment rate is currently at 3.5%, a five-decade low, with 1.7 job vacancies for every unemployed American. While the hot job market has been excellent for workers it continues to fuel inflation due to strong wage growth. Despite the current attempts by the Federal Reserve to cool the economy, their projections show unemployment rates rising to 4.4% by the end of 2023. Why is this projection significant? Well, history shows that when the Fed tightens and hikes rates, employment significantly drops. However, the Fed’s 2023 projections balk at what history has taught us. Present day differs as employers are more concerned about acquiring talent and filling positions rather than the possibility of layoffs. While some major companies (Meta, Stripe, Amazon, and Twitter) have announced layoffs, hiring rates continue to increase amid economic uncertainty. According to the 2023 National Business Trends Survey from the Employer Associations of America (EAA), hiring is still a priority as 34 percent of executives surveyed plan to maintain 2022 staffing levels in 2023; 61 percent of respondents plan to hire permanent staff in 2023.

Pay Transparency

Over the past few years cities and states have enacted varying levels of pay transparency laws and many more are slated to follow suit. While the goal is to narrow disparities, employers are grappling how to approach and implement these laws with best practices in mind. Unfortunately,  New York City is currently under fire, as some companies are sidestepping a new pay transparency law that requires job postings to include a “good faith” salary range by listing extremely broad wage ranges. This isn’t a trend that is silently going to fade away, in fact, employees want pay transparency. To stay ahead of the curve, employers should start preparing for full pay transparency now by establishing or updating their compensation programs.

Closing Thoughts

The lasting effects on the economy due to the pandemic may feel like Groundhog Day, but your organization does not have to navigate these challenges alone. Cascade’s Compensation Team is ready to partner on your compensation needs. From market-based pay assessments, to pay structure creations, pay equity reviews, and more, we are here to help!