US employer salary projection 2023 to lag inflation – Mercer

The good news is that salaries in US companies are going up. The bad news is that despite the increase, 2023 compensation budgets and salary projects for US employers are unlikely to meet employee expectations amid rising high inflation.

That’s according to Mercer’s newly released 2023 US Compensation Planning Survey, which revealed that employers are budgeting an average of 3.8% for merit increases in 2023, compared to the 3.4% delivered in 2022 – and 4.2% for their total increase budget for next year (compared to 3.8% this year).

Industry-wise, financial services is leading the market at 4.0% merit and 4.7% total increases, while the technology industry – typically a market leader with their compensation awards – is bang on the national average for total increase (4.2%) but lagging slightly for merit increases (3.7%) marking a change from previous years.

Labour shortage driving increases

Continued labour shortage is driving the increases in compensation budgets for employers, which aligns with long-standing practices focused on paying based on demand for labour, not inflation or cost of living.

The projected salary increase is less than half of the current annual inflation rate of 8.5%, showing that US employers are lagging behind inflation – a disconnect that is creating frustration with workers, who have seen all of their wage gains eroded by rising costs.

This will continue to drive dissatisfaction with compensation programs and pressure employers to increase wages in the months ahead, the report states, with the tight labour market and heightened turnover likely forcing employers to respond.

Off-cycle increases are increasing

To combat the issue of employee retention, employers (85%) are increasingly using off-cycle increases. While in March, just 38% of employers said they were providing ad-hoc increases, the latest survey reveals 64% of employers are providing off-cycle increases.

This is a continuation of practices seen over the last year, which has resulted in significant gaps in employers’ total compensation spend relative to budgets for 2022.

Lauren Mason, Senior Principal in Mercer’s Career practice says employers are caught in the middle of recessionary concerns, a tight labour market, and shifting employee expectations due to inflation.

“Given the financial uncertainty that currently exists combined with the tight labor market, employers should consider setting flexible budgets and prioritise investments in critical and fast-moving segments, such as their hourly workforce.”