three ways to approach 2023 wage increases amid rising volatility | aon (2023)

November 2022 / 10 minutes reading

three ways to approach 2023 wage increases amid rising volatility | aon (1)

Planning pay rise budgets for 2023 amid economic volatility and the Great Resignation era has become more difficult.

Main Conclusions

  1. Salary raise decisions can be made considering a variety of internal and external data sources.
  2. Salary increases can be influenced by many factors, including different work models, the type of work, and the type of skills required.
  3. A targeted approach to the compensation budget can lead to optimal compensation differentiation for talent.
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Economic volatility, geopolitical tensions and a host of other challenges are reducing business performance while pressure on talent remains high.

Many companies granted more aggressive salary increases in early 2022 (read more in our article “As inflation rises, the latest payroll data reflects above-average increases') as they entered the post-pandemic recovery looking to compensate and retain top talent. Looking ahead to wage increases in 2023, the business environment has weakened. Continued uncertainty from inflation, an expected recession and ongoing strong labor markets require a different approach to salary decisions for the coming year.

“Speaking to my clients this year, I expect very different wage growth practices across companies as they navigate volatile and uncertain environments,” said Adam Barnett, Partner, Human Capital Solutions at Aon. "While there is always a combination of external and internal factors involved in setting payroll budgets, rising economic uncertainty and increasing market fragmentation make planning pay rises particularly difficult this year."

High-performing companies favor larger raise budgets and tend to provide more competitive total compensation to avoid unwanted employee turnover. Some might try tootake into account the impact of inflation on wages.

Companies that are focused on elements of total compensation other than salary, or are facing tougher business conditions, or have provided above-average raises in 2022 may expect below-average raises in 2023.

Consider a variety of data to make salary increase decisions

In the past, companies have relied heavily on external salary surveys to understand the market and the practices of their competitors. However, many HR and compensation professionals tell us that they intend to seek additional perspectives to guide their deliberations in the coming year.

"In the face of today's uncertainty, survey takers may lack conviction in the polls they submitted, and thus the actual poll results," said Barnett. "Actual wage measures taking place in early 2023 could differ significantly from planned budgets."

However, several regions are planning higher pay rise budgets in 2023, based on the latest figures from the second edition of theAon Salary Increase and Turnover Study for 2022.

In the United States, average total budgets for pay increases across industries are projected at 4.6%, a modest increase from the 4.5% paid in 2022, but much higher than the recent historical US average of about 3%. In the UK and Singapore, budgets are forecast at 4.5%, compared to 4% last year. In Germany and Australia, budgets are forecast at 4% in 2023, up from 3.5% in 2022.

"The data reflects the continued tightening of the labor market in many parts of the world," said Ephraim Edelman, partner at Aon's Human Capital Solutions.

However, external data is part of the story for developing a raise strategy in a volatile and uncertain environment. The key is to contextualize raise planning surveys with historical analysis and the unique circumstances of your own industry and organization. “Consider different data points—both external and internal—and decide what makes sense for your business,” says Edelman.

Define salary increases based on various factors

While it is crucial for companies to define and adapt wage increases to factors such as different types of workers and the type of work, organizations need to be flexible in their wage principles. By making incremental changes to optimize wage effectiveness, companies can align their strategies with long-term wage and performance factors.

"In addition to adopting different pay structures for different work models, companies should define their 2023 pay increases in the context of the competitiveness of their current pay level and the employee value proposition," said Rahul Chawla, Partner at Human Capital Solutions, Aon. "For example, many companies are considering a skills-based compensation program to ensure future skills are maintained and developed within their organization."

When moving to acompetency-based compensation model, employers need to identify future skills that are critical to business success, determine the value of those skills, and reward them accordingly (read more in our article “Close the skills gap for the future to drive business success"). Salary increases may be distributed to those who expand or deepen their current skills and/or acquire new skills outside of their current job role. This not only ensures the personal development of employees, but also enables companies to adapt to changes and keep up with the fast pace of technology.

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Average projected budgets for salary increases across all industries in the US

Those:Aon Salary Increase and Turnover Study for 2022

Projected median wage increase budgets in Germany and Australia

Those:Aon Salary Increase and Turnover Study for 2022

In addition to introducing different salary structures for different work models, companies should set their salary increases for 2023 in the context of the competitiveness of their current salary level and the value proposition of their employees.”

Rahul Chawla
Partner, Human Capital Solutions, Aon

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Identify a targeted approach to your budget

Aon's workforce data shows a significant difference in the extent to which employers differentiate wages (higher vs. lower raises) and how this approach varies across salary ranges. The philosophy of salary differentiation is key to ensuring that salaries match the promotion level, performance, influence and potential of your employees. Consider some of the following scenarios:

  • What salary increase is appropriate and affordable for employees who are "average" in terms of performance and/or criticality (ie, in the middle of 20% of the distribution of performance and/or criticality at each pay grade)? For example, based on a company's particular circumstances, this could equate to 6% for individuals making $100,000 to $150,000 per year.

  • How far do you want to differentiate pay for employees with lower or higher performance, impact and/or potential than an "average employee"? Continuing with the example above, if an average employee in a given pay range gets a 6% raise, should an employee in the bottom quintile of that pay range get a 2% raise (i.e., 33% of the average)?

  • To what extent should this philosophy – this dispersion and/or differentiation of wage increases – vary for low and high earners?

“Using this type of pay matrix with your actual team profile can help model a raise pool that is embedded in your employees' compensation philosophy and value proposition,” explains Edelman.

Incorporating inflation into the salary increase process


Use cost of living allowance (COLA)?

Do not use the COLA concept

Do not use the COLA concept

Use COLA, but make it clear that this is a one-off attack of COLA

Also, communicate clearly that the market and labor costs are the most important factors affecting wage levels

A wage adjustment should always be referred to as a market adjustment. The frequent use of COLA can lead to the exercise of an acquired right.

Any general increase should come under the umbrella of “market adjustment”.

Do we adjust for inflation?

No, look at the value of the labor market, not inflation

No, look at the value of the labor market, not inflation

Yes, compensate for inflation and make sure you pay according to your compensation philosophy.

If you are unionized and the agreement meets or exceeds inflation, apply the same approach to all employees.

Historically, benefit increases have outpaced inflation. Employers should compare pay increases to the value of skills and not link pay increases to inflation.

In countries with high inflation, salary increases may be lower than the prevailing rate of inflation. We strongly recommend setting up a process to deal with this situation.

Do we change the frequency of our raises?

NO. Only more frequent wage increases for countries with very high inflation rates.

Yes, for hourly workers and countries with high inflation.

Yes, at least for non-union hourly workers, twice a year.

Also track top talent and/or important work if needed.

We recommend following the market.

However, be proactive in countries with high inflation, evaluate and increase wages more often than once a year.

The budget can be split between the two increases.

Do we compare more often?

Keep current practice and reference once a year.

The market begins to watch the market twice a year.

For hourly workers, the frequency is once per quarter.

When it comes to hourly workers, companies search monthly or at least bi-monthly.

Key papers are compared at least once or twice a year.

For hourly workers and key functions it is recommended to monitor the market twice a year.

What are you communicating to your employees?

Consult your compensation philosophy. Usually he will say that companies are paying xx% of the market.

Consult your compensation philosophy. Usually he will say that companies are paying xx% of the market.

Consult your compensation philosophy. Usually he will say that companies are paying xx% of the market.

A clear, transparent and well-communicated compensation philosophy is more important than ever.

The message to employees should be that the company pays at market rate.

three ways to approach 2023 wage increases amid rising volatility | aon (3)

(Video) Market outlook 2023: A look at inflation, stocks, the Fed, housing and more

Looking to 2023

When competing for salary, there is little room for error if that number is not properly determined from a competitive standpoint. Leading companies know that taking a holistic view of total reward and employee wellbeing is the most sustainable and successful strategy for maintaining employee engagement.

Employers need to be strategic in optimizing HR spend. Some tips include:

  1. Create a model or philosophy based on your business needs

  2. Carefully assess your current salary competitiveness to ensure you have a solid basis for future salary decisions

  3. Insert an internal equity lens

Ultimately, setting wages in a highly inflationary and volatile environment will be a delicate balancing act.

"A tight labor market will continue to challenge employers in the short term," said Brooke Green, head of human capital solutions, North America, Aon. "As revenue increases, companies need to review their total reward strategies and address resiliency, agility, wellbeing and purpose to retain and attract the best talent."

To help your organization plan for the next compensation and benefits cycle, readAon Salary Increase and Turnover Study for 2022. For more information on how to develop a compelling total rewards program and build employee resilience, see our latestperceptions.

General Disclaimer
The information contained and statements expressed herein are general in nature and are not intended to address the circumstances of any particular person or entity. While we strive to provide accurate and timely information and to use sources we believe to be reliable, there is no guarantee that this information is accurate at the time it is received or that it will continue to be accurate. No one should act on this information without obtaining appropriate professional advice after a thorough assessment of the specific situation.

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The content contained herein may not be reproduced, reused, reprinted or redistributed without the express written consent of Aon, unless otherwise authorized by Aon. To use the information contained herein, please write to our team.


What are the pay raises for 2023? ›

As the new year begins, federal employees may be wondering how much extra money they'll see in their paychecks. President Biden made official a 4.6% average pay raise for civilian federal employees. Of that, 4.1% will go toward an across-the-board increase and the remainder will vary depending on where employees live.

What is Aon 2023 salary increase projections? ›

Average budgeted salary increases for 2023 is predicted to be at 5 percent, up from 4.8 percent this year in the U.S. This includes merit raises, promotions and adjustments.

How do you communicate with a wage increase? ›

How to communicate a pay raise with your employee
  1. Explain why they're receiving a pay raise. ...
  2. Highlight any specific contributions your employee made to the company that contributed to the increase in salary.
  3. Discuss the raise in dollar amounts instead of percentages.

What is the projected salary increase for 2023 in South Africa? ›

This is according to WTW's latest Salary Budget Planning Report, which found that local employers are considering average pay increases of 6.1 percent this year. The high number is largely driven by the desire to attract and retain employees in a high inflation and increasingly competitive labour market.

Will paychecks be bigger in 2023? ›

New IRS tax brackets take effect in 2023, meaning your paycheck could be bigger. Higher federal income tax brackets and standard deductions are now in effect, potentially giving Americans a chance to increase their take-home pay in 2023 and shield more of their income from the Internal Revenue Service.

What is the pay scale increase for 2023 GS? ›

GS employee.

2022 locality rate: $62,024 ($53,377 x 1.1620). 2023 GS rate: $55,564 (after 4.1% across-the-board increase).

What is the average merit increase for 2023? ›

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.

What percentage raise should I ask for? ›

It's always a good idea to ask for anywhere between 10% to 20% higher than what you're making right now. You may be able to ask for more based on your performance, length of time with the company, and other factors. Make sure you come prepared when you negotiate your raise and be confident.

How much should salary increase with inflation? ›

The obvious solution is to ask for a pay raise of 8.5% or so to at least stay even with inflation, but that's not always the best strategy, experts say. Your first order of business should be to research pay rates not only for your specific industry and job, but also average pay raises across all industries.

How do you negotiate a pay rise with an employee? ›

8 tactics to effectively negotiate a pay raise
  1. Remain Authentic and Professional. ...
  2. Go through your presentation before submitting it. ...
  3. Create time to discuss this issue with your boss. ...
  4. Don't rush into quoting the salary. ...
  5. Have a list of reasons why you need the raise. ...
  6. Show your performance record.

What is the best way to increase salary? ›

5 Ways To Increase Your Salary
  1. Change jobs. To preface this tip, you should know that there is a fine line between making career moves and job hopping. ...
  2. Quantify value. This can be a tricky area depending on your job. ...
  3. Invest sweat equity. ...
  4. Take on leadership responsibility. ...
  5. Start early.

How do you propose a salary increase to an employee? ›

Build a solid case. Justify your salary increase by basing it on your performance and contributions to the company. Always keep a documentation of your work and track your performance for the most recent year, especially if you are anticipating a request for pay increment.

What is a reasonable pay increase per year? ›

A good pay raise ranges from 4.5% to 5%, and anything more than that is considered exceptional. Depending on the reasons you cite for a pay raise and the length of time that has passed since your last raise, you could request a raise in the 10% to 20% range.

What is a reasonable increase in salary per year? ›

On average, companies that offer employees a three to five percent wage increase are offering a fair raise. What constitutes a good raise usually depends on your perception and unique circumstances.

What is a fair salary increase per year? ›

Your salary should increase by at least 3-5% per year.

Anything above that would be considered higher than average. Of course, the average annual increase between 2021-2022 is 7.6%, but this is partially due to abnormally high inflation rates.

Will Walmart increase wages in 2023? ›

Jan. 24, 2023, at 12:34 p.m. NEW YORK (AP) — Walmart said U.S. workers will get pay raises next month, increasing starting wages to between $14 and $19 an hour.

What is the cost of living increase for 2023 for federal employees? ›

Under the changes for 2023, federal employees will see a pay increase across the board of 4.1% and a locality pay average increase of 0.5%, starting Jan.

Can you negotiate GS steps? ›

Under the government pay system, it can be difficult to negotiate a higher GS level—as the pay grades are called under the government's General Schedule—than the one listed in the job description. But each grade has 10 steps that come with a higher salary and career advancement, and those step levels are more flexible.

How often do GS employees get a raise? ›

Current employees of the federal government typically receive an annual pay raise. The federal pay raise is generally applicable in the first pay period of the upcoming year.

Can you negotiate a higher merit increase? ›

Most likely, to receive a higher raise, you'll have to make a case that includes both the salary data you've compiled and evidence of the value you bring to your team and organization. To strengthen your case, look at your track record within the company.

What is a 3 percent merit increase? ›

To understand how to calculate a merit increase, let's take a look at an example. Say you offer a 3 percent merit increase to someone who currently earns $80,000 annually and receives a monthly paycheck. Current salary x merit increase percent = annual raise. 80,000 x .03 = 2,400 annual raise.

Is 3% a good merit increase? ›

The amount of a merit increase can vary widely based on the company giving it and the employee receiving it. It is standard for companies who take good care of their employees to award top performers with an increase in the neighborhood of 3% to 5% on an annual basis.

What not to say when asking for a raise? ›

How Not To Ask for a Raise
  1. Don't ask via email, if possible. ...
  2. Don't ask at a stressful time. ...
  3. Don't give an ultimatum unless you're willing to lose the job. ...
  4. Don't use information about colleagues' salaries as a reason why you should get a raise. ...
  5. Don't supply too much personal information.
Nov 20, 2022

Can I ask for a raise due to inflation? ›

Basically, Lares recommends, you can use inflation as a benchmark to make a case for a raise, but don't put all your eggs in one basket — give your employer more things they can say yes to if it can't be more money. Some of them translate to more money in your pocket.

Is it crazy to ask for a 30% raise? ›

"30 to 40 percent is a big increase," Herjavec said, adding that most businesses give raises of approximately "8 to 10 percent." "You shouldn't ask for something that big," he added.

What is the pay raise for 2024? ›

This year's iteration of the FAIR act offers the largest pay increase suggestion since the first inception of the bill: 8.7%. This includes a sizable average locality boost of 4% with the across-the-board percentage being 4.7%.

What are the 7 steps to negotiate a raise? ›

Following these steps can increase your chances of receiving a pay increase after negotiating with your employer:
  1. Research salary data for your position. ...
  2. Consider the company's financial performance. ...
  3. Reflect on your achievements. ...
  4. Decide on your target range for the raise. ...
  5. Prepare your presentation.
Feb 4, 2020

What is the best way to negotiate for an increase in starting salary? ›

Here are eight tips for how to negotiate a salary that can help you tactfully and confidently ask for what you want.
  1. Become familiar with industry salary trends. ...
  2. Build your case. ...
  3. Tell the truth. ...
  4. Factor in perks and benefits. ...
  5. Practice your delivery. ...
  6. Know when to wrap it up. ...
  7. Get everything in writing. ...
  8. Stay positive.
Jan 7, 2022

What are the different types of salary increases? ›

The four main types of pay raises are cost of living adjustments (COLA), performance-based pay raise, promotions, and equity raises.

How do you convince a company to increase your salary? ›

How to Convince Your Boss to Give You a Raise
  1. Think About Compensation vs. Pay. ...
  2. Forget About 'Fair' Pay. A business needs to make a profit based on objective parameters. ...
  3. Review Comparable Job Listings. ...
  4. Update Your Job Description. ...
  5. List Your Position's Benefits. ...
  6. Present Your Case.
Jun 21, 2022

What is cola increase for 2023 for employees? ›

2023 Cost of Living Adjustment (COLA)

Based on the increase in the Consumer Price Index, there will be an 8.7 percent Cost of Living Adjustment (COLA) for most retired pay and Survivor Benefit Plan annuities effective Dec. 1, 2022.

Why should minimum wage be raised? ›

By boosting the income of low-wage workers with jobs, a higher minimum wage would lift some families' income above the poverty threshold and thereby reduce the number of people in poverty.

What will h2a wages be in 2023? ›

In 2023, California has the highest rate, $18.65/hour, while states in the Southeast (Louisiana, Arkansas, Mississippi, Georgia, Alabama, and South Carolina) have the lowest AEWR, $13.67/hour (Figure 2). Overall, all southern states have AEWRs below the national average AEWR of $16.14/hour.

What will minimum wage be in 2023 in California? ›

Rate Changes Due to the Minimum Wage Increase – January 1, 2023. Due to the enactment of Senate Bill (SB) 3, the California minimum wage increased to $15.50 per hour, effective January 1, 2023, for all employers.

What is the 2023 federal Cola? ›

As predicted a few weeks ago, the 2023 COLA has officially been revealed at 8.7% for Social Security recipients. This means the COLA for federal retirees who receive a CSRS or CSRS-offset pension will also see a 8.7% boost.

How much will SSI disability checks be in 2023? ›

SSI amounts for 2023
RecipientUnrounded annual amounts for—Monthly amounts for 2023
Eligible individual$10,092.40$914
Eligible couple15,136.931,371
Essential person5,057.77458
1 more row

Will there be another cost-of-living payment in 2023? ›

A further set of Cost of Living Payments, to be made to the same groups during 2023/24, was announced in the 17 November 2022 Autumn Statement.

How do you get the $16728 Social Security bonus? ›

Who is eligible for Social Security bonus? For every year that you delay claiming past full retirement age, your monthly benefits will get an 8% “bonus.” That amounts to a whopping 24% if you wait to file until age 70.


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