This year is flying by! Many of us have made it through the annual increase and performance management season and are, hopefully, able to take a breath.

So, are you curious? I know I am. There is the continued anticipation of a recession and the labor market remains tight, yet companies report they are in a ”growth” stage. Just how did employers spend their annual increase budget?

Let’s take a peek!

Slightly below budget

In November 2022, participants of the US Compensation Planning pulse survey reported that they were budgeting 3.9% for merit increases and 4.3% for total increases (on average, including zeros). Now, in March 2023, when asked what was actually delivered to employees, it appears they paid out close to, but slightly below, the predicted budgets and delivered actual merit increases of 3.8% and total increases of 4.1% . Keep in mind, this is still an increase from 2022, when actual merit and total increases were 3.4% and 3.8%, respectively.

Mercer QuickPulse™

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Other adjustments slowing

Earlier on in the labor shortage, we saw employers providing higher pay for new hires and making market and equity adjustments in greater numbers and/or percentage than previously. The national average base pay change from January 1, 2022 to September 30, 2022 was 4.7%, which indicated that pay was being driven up by more than annual increases. However, when looking at base pay changes from October 2022 to March 2023, the national average base pay increase was only 3.4%, while the median was at 2.8%.

Industries vary

There are some significant differences when you look at pay changes by industry. Energy, Life Sciences, and Other Manufacturing all significantly outpaced the national average for actual merit increases. Retail & Wholesale along with Healthcare continue to lag behind. Both delivered merit increases of 3.4% and total increases of 3.6% — significantly below the national average. In two industries that are seriously hurting for talent, it will be interesting to see how this situation evolves.

Incentives leveling out

We are seeing a return to more typical payout distributions for short-term incentives. Just under half of companies who have short-term incentives reported paying out plus or minus 25% of target. Only 12% reported paying 125% of target or more. Perhaps this is a result of recalibrating performance targets, not necessarily weaker performance.

Beyond compliance

We are starting to see an uptick in companies choosing to consider revealing their pay practices to employees and prospects. Though we know many have complied, or are in the process of complying, with the pay transparency laws that have been enacted in states like New York, California, and Colorado, we are now seeing more companies looking to do more than just comply. But, sharing pay ranges with the employee population does open a whole can of worms, so for most companies it’s likely to be an iterative process that includes auditing, education, and multiphase communication.

What's next?

Are we seeing a slowdown in compensation, or just a return to normal? Maybe they are one in the same. In any event, it seems the difficulty in finding and keeping employees, particularly in certain sectors, is here to stay. It makes sense that organizations are setting aside the more reactive tactics of the past several years and looking more strategically at how they will be attracting and retaining much needed talent. According to the inaugural QuickPulse™ survey that collected data in March 2023, half of the US and Canada respondents plan to revisit their total rewards strategies in the next 6 to 12 months in order to increase their ability to attract and retain employees.

Do you need help adjusting your compensation strategy for the challenges today and to set you up for success in the future? Mercer’s got your back! Email us or call 1-855-286-5302.