How Employers Are Managing Compensation Challenges in 2023

​With 2023 well underway, many employers are still trying to find the right levels of pay for their employees. The stakes are high: If employers don't get compensation right, they may find themselves losing out on talent.

The quest to attract and retain talent over the past year has already caused employers to push pay levels higher than initial projections. Data from consulting firm WTW shows that 70 percent of U.S. employers spent more than they expected to adjust employees' pay levels last year. Now, there are signs that this trend may continue in 2023.

In general, compensation budgets are continuing to increase faster than they have in at least 15 years. WTW projects salary increase budgets will grow by an average of 4.6 percent in 2023.

"The last time we saw [a percentage increase] starting with a 4 was in 2007," said Lori Wisper, managing director with WTW. "There is continued pressure to meet employee expectations around inflation, if not match inflation."

To succeed, employers must first work hard to offer the right level of base pay.

"Base pay is table stakes that just allows you into the game," Wisper said. "If you don't get that right, that is likely to be a problem."

Getting it right, in many cases, means going beyond annual pay increases. Employers are also making off-cycle pay adjustments to address pay equity and pay compression issues, or just to keep employees on board. In addition, employers are making market adjustments for jobs in certain in-demand fields, such as supply chain and logistics and retail, according to data from consulting firm Mercer.

Compensation Risk Management

In many ways, managing compensation in this environment is about avoiding losses. "The key is to use the salary budget wisely by making choices based on specific priorities," Wisper said. "It's an exercise in risk management."

The risk, of course, is the loss of important human capital. While replacing employees is expensive, losing key talent may be difficult to quantify. Therefore, employers can either find ways to reduce the cost of replacing employees or adjust pay upward when the market demands it. In many cases, the risk and cost of losing workers may be greater than the cost of increasing their pay.

"If you need employees with a hot skill set, you'd better be aggressive," said Patrick Mulvey, director of talent acquisition for e-commerce company Saatva, which has offices in New York City and Austin, Texas. He considers an employee in their second year with the company to be exponentially more valuable than when they were hired.

"We have to adjust pay for skills to stay competitive in the market," he said. "Four or five percent is not enough; 10 percent may be more appropriate."

Mulvey also recognizes that his 300-employee company cannot compete with large technology companies for talent using salary and stock awards alone. That's why Saatva leverages remote-work opportunities as much as possible.

"People are much more willing now to give up some pay to get remote work," he said.

The company also manages compensation costs using pay arbitrage. "We can hire someone living in Idaho with five years of experience for the same price as someone in California with two years of experience," Mulvey said.

Be Ready with Answers

No matter what employers offer employees to keep them on board, they are likely to face more questions related to compensation. Employers are responding by increasingly having conversations, often proactively, with employees about how and why they make pay decisions.

These conversations are becoming even more important as pay transparency laws giving employees access to more, if not necessarily complete, pay information become more widespread.

"Employees may see a job posting in the company and become confused and angry" if their own pay differs from what is listed, said Linda VanDeventer, vice president with consulting firm Segal in New York City. "This is the time to educate employees about how the company makes pay decisions so they don't have to fill in the blanks on their own."

Front-line managers and HR professionals throughout the organization are important points of contact for employees with compensation-related questions, and "[t]hey need to know how to answer those questions," said Amy Mosher, chief people officer at HR technology firm isolved in Charlotte, N.C. "That is why we also make compensation managers on staff available to answer questions."

Rethinking Compensation Philosophy

An organization's compensation philosophy can be an important tool not only for guiding pay decisions, but also for communicating the reasons behind those decisions. If a compensation philosophy is no longer aligned with the reality of the organization's pay system and decision-making, it may need to be updated.

"If you developed your compensation philosophy more than five years ago, it may no longer be serving you well," Wisper said. "So much has changed during that time."

An updated compensation philosophy could state what the organization considers to be competitive pay and how it will pay for performance, manage pay compression, and identify and pay for critical skills and positions.

For example, an organization's compensation philosophy can support overall benchmarking of roles, along with decisions about which roles warrant a pay premium and which ones can be paid closer to the average. This approach also supports proactive budgeting for positions before the organization undertakes additional hiring. Once the hiring process is underway, the employer can measure whether the identified pay levels are enough to attract talent for specific goals and where they may be falling short.

Communication Is Key

By reviewing and communicating their compensation and total rewards philosophy regularly, employers can reassure employees that they are paying attention to market trends. "When people ask questions about pay issues, you need to have an answer," Wisper said.

This communication should happen not only when recruiting employees, but throughout their tenure. "The goal is to build trust and understanding among employees," Mosher said. "You have to make a decision to be transparent."

Communication is also essential to make the most of what the employer does offer employees. For example, Mosher sees employers pushing variable pay opportunities down to lower-level positions. However, brand-new pay programs need a strong introduction so employees understand what is at stake, as well as the potential impact on incentive payouts.

These conversations are just the beginning. "It is a good idea to communicate the value of everything the organization provides to employees at least annually," Mosher said.

Joanne Sammer is a New Jersey-based business and financial writer.