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

November 2022 / 10 minutes reading

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.

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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.

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

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.

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