Revised 2022 Salary Increase Budgets Head Toward 4%

In midyear 2021, most salary increase budget projections were pegged at around 3 percent to 3.2 percent for 2022. Those expectations have since gone by the wayside.

In newly released findings by The Conference Board, a membership and research organization for large businesses, executives now estimate that salary increase budgets for 2022 will be 3.9 percent, which would be the highest growth rate since 2008.

Due to high wage growth and inflation since April 2021, when The Conference Board conducted its 2021 Salary Increase Budget Survey, the organization decided to field the survey again. It did so from Nov. 8 to Nov. 19, 2021, with responses from 240 U.S. employers, more than half of which are companies with more than 10,000 workers.

Among the findings from the November survey:

• The projections for 2022 salary increase budgets jumped almost a full percentage point, from 3 percent in April to 3.9 in November.
  

• Looking back at 2021, the average salary increase budget for this year jumped from 2.6 percent in the April survey to 3 percent in November.

Future Wage Growth to Top 4%

"It is likely that severe labor shortages will continue through 2022," wrote Gad Levanon, vice president of labor markets at The Conference Board. "During that time, overall wage growth is likely to remain well above 4 percent. Wages for new hires and workers in blue-collar and manual services jobs will grow faster than average."

At the same time, he noted, "there are no signs of inflation slowing down, and it may remain elevated in the coming months, increasing the need for cost-of-living adjustments."

He warned, "A wage-price spiral—where higher prices and rising wages feed each other, leading to faster increases in both—may already be in the works."

In the chart below, "salary increase budgets" refers to the pool of money an organization dedicates to salary increases for the coming year. It is strongly related to the typical raise a worker would receive in a given year, as represented by a percentage of current payroll. "Salary structure movements" are adjustments to the minimums, midpoints and maximums of an organization's pay ranges to account for changes in the cost of living and salary markets within a given industry.

Pay Compression Issues

While overall wage growth dramatically accelerated during the past 6-8 months, Levanon noted, "that increase is especially strong for workers under the age of 25 and for people who switched jobs in the past year. This suggests that much of the wage acceleration has been among workers who were recently hired."

Faster wage growth of new hires, however, creates pay compression, which then puts further pressure on employers to raise pay across the board.

"When more experienced workers feel that their pay advantage is no longer significant, they may seek new jobs in the tight labor market, which leads to high labor turnover of more experienced workers," Levanon explained. "Employers faced with extensive departures of experienced workers will raise wages faster for current employees in order to maintain an effective workforce."

Pay compression further pressures employers to raise pay across the board.

Rising Pay Still Trails Inflation

HR consultancy Mercer also expects that the average amount of employee raises in 2022 will be higher than assumed earlier this year but doesn't expect salary increase budgets to rise quite as high as The Conference Board is forecasting—at least not yet.

While the pandemic has driven inflation up to levels not seen since 1990, with consumer price increases up 6.2 percent for the year as of October 2021, employers are not expected to be able to cover all of employees' rising costs, Mercer noted in its latest compensation planning survey of more than 950 employers. [Update: the consumer price index increased 6.8 percent year over year in November 2021, the U.S. Bureau of Labor Statistics reported on Dec. 10.]

Mercer's researchers found that as of October 2021:

• Merit budgets for discretionary annual increases to base pay, typically for employee performance, are projected at 3.2 percent for 2022. Total increase budgets, which include merit along with other types of base pay increases such as promotion pay increases, are projected at 3.5 percent. These numbers are up slightly from the 2022 projections of 3 percent and 3.3 percent, respectively, according to Mercer's August survey, and they represent a gain over the actual 2021 budgets of 2.8 percent for merit and 3 percent for total increases.
  

• Variable-pay incentive bonuses, which are one-time cash payouts that do not affect base pay, are projected to significantly increase compared to last year, with 1 in 4 employers saying they will have an overall bonus pool more than 10 percent higher than last year.
  

The majority of employers set compensation wages based on cost of labor—the market rate for a job—versus cost of living. Because of this, there isn't a direct relationship between annual merit budgets and inflation, Mercer said.

Over the last 10 years, inflation has typically hovered between 1 percent and 2 percent, while merit budget increases have been between 2 percent and 3 percent, the consultancy noted. While the current labor market is driving some increases in pay, employers are concerned about economic uncertainty "and therefore looking to other vehicles such as incentive pay to reward and retain workers in this tight labor market," the researchers said.

"The reality is that most employees would have no trouble finding a new role, and likely command a premium for job switching," Mercer reported.

Pay Planning Tips

Lauren Mason, senior principal in Mercer's career business division, shared three recommendations for employers to consider during this year's compensation planning period:

Prioritize hourly pay

"With unprecedented levels of churn in the labor market, wage growth at record pace and increasing external scrutiny, now is the time to focus on hourly pay strategies," Mason advised.

Consider a segmented approach

Ensure budget dollars "are focused on addressing gaps in competitiveness and not being spread like peanut butter," Mason said. "Consider a segmented approach by offering higher wages to both new joiners and high-performing current employees in critical business segments," as well as those whose pay is below market rates.

Keep in mind the employee experience

Employees have heightened expectations around pay, so equip leaders with the resources to communicate pay decisions effectively, Mason recommended.

Aside from pay, she noted, "in many cases it's when the broader employee experience falls short that employees will start to shop their options. Employees are feeling exhausted and burned out from the pandemic. Employers need to examine ways to support their employees' unmet needs, deliver more compelling jobs and create more flexible work environments."

[Addendum]

Related SHRM Articles:

Turbulence Ahead: Will 2022 Break Compensation Budgets?, SHRM Online, December 2021

Hiring and Benefits Costs Hit 16-Year Highs, SHRM Online, November 2021

As Minimum Wages Rise, Prepare for Pay Compression Issues, SHRM Online, October 2021

[Need real-time, HR-reported compensation reports? Check out the SHRM Compensation Data Center]