2023 Merit Pay Increases: What You Need to Know
Rob Byron December 15, 2022 HR Trends, Leadership, Talent Management
In today’s competitive labor market, it’s critical that employers’ 2023 Merit Pay Increases are in line with trending data.
In November 2022, SHRM shared that employers in the U.S. plan to boost salaries an average of 4.6 percent in 2023, up from 4.2 percent in 2022, according to the latest Salary Budget Planning Report by consulting firm WTW. It is critical for organizations to be aware of these trends and data in today’s competitive labor market as they fight to retain and engage key talent. While the average annual pay raise has traditionally been around 3%, 2022 saw much larger pay increases and 2023 may see the largest increases since 2001.
There are a lot of moving pieces in making informed, data-driven decisions for your organization. These include:
- Merit pay increase forecasts
- How inflation impacts merit increases
- Looming concerns surrounding potential layoffs
- A possible recession in the upcoming year
- The importance of aligning your merit pay increases to increasing employee retention, particularly your top talent and high performers
Unfortunately, employers today could find themselves in a conundrum as they will likely be giving their employees historically high merit pay increases in 2023. However, it is possible that these higher increases still may not meet the needs and expectations of their employees, who are faced with historically high inflation. Due to inflation, even with a 4.6% pay increase, some employees may still feel like they have taken a step backwards when it comes to their pay.
Below, we have highlighted additional data related to merit raises in the midst of record-high inflation to help guide employers when making these decisions.
2023 Merit Pay Increase Forecasts
- A September 2022 SHRM article detailed how salary increase budgets in the U.S. are projected to grow, on average, just over 4 percent for 2023, which is less than half of the current annual inflation rate of 8.5 percent, according to survey data. Employers say inflationary pressures and the ongoing challenges of finding and keeping workers are the main reasons for the higher projected increases.
- A September 2022 Fortune article detailed how a quarter of employers that were surveyed plan to give increases in the range of 5–7%. And 48% said they planned on salary budget increases that are higher or significantly higher than in 2022.
- According to Human Resource Executive, HR leaders are planning to turn to larger-than-usual salary increases in 2023, driven by a hot job market and record-high inflation.
- WorldatWork’s “2022-23 Salary Budget Survey” revealed that salary increase budgets reached their highest level in 20 years in the United States, rising to an average of 4.1% in 2022 with a 3.8% median.
As organizations make decisions around merit pay increases for 2023, there are many important variables to consider in order to remain competitive with the outside market. It is critical to approach these decisions with as much knowledge and preparation as possible, armed with the necessary data and information on market trends around merit increases, inflation, employee retention, and the various other factors that impact merit increases.
The reality is that merit pay increases will likely still lag inflation and employees may be disappointed. By conducting the appropriate research up front, employers can feel confident about their merit pay increase policies and be better prepared for these conversations with their employees.
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