Salary Increase Budgets Hit Two-Decade High

Salary increase budgets in 2023 reached their highest level in 20 years, new research shows, and employers are planning to stay fairly aggressive on pay going into next year despite looming economic fears.

That's according to new data from WorldatWork, which found that U.S. employers, on average, increased salary budgets by 4.4 percent in 2023, higher than projections of 4.1 percent. U.S. employers also reported that high-performing employees—26 percent of their workforces—received merit increases 1.4 percent higher than those for middle performers and 3.9 percent higher than those for poor performers, according to the survey.

The total rewards association said its survey of more than 6,500 employers reveals a "surge in salary increase budgets to their highest point in two decades and a surprising deviation from last year's projections."

Meanwhile, the survey found U.S. employers are budgeting an average increase of 4.1 percent in 2024. Though down from the actual increase of 4.4 percent in 2023, the number remains significantly higher than the 3.1 percent average salary budget increase in 2021 and years prior, WorldatWork said.

Sue Holloway, director of executive compensation strategy at WorldatWork, said the findings indicate that organizations must be strategic about compensation next year.

"The rapid rise in salary increase budgets over the past couple of years, combined with today's volatile economic environment, challenges HR pros to leverage data and think strategically as they formulate 2024 compensation budget recommendations and negotiate with CFOs," she said.

Salary Budgets Growing Around the World

The U.S. isn't the only country experiencing high pay boosts this year.

The average total salary budget increase in the United Kingdom, for instance, exceeded projections, reaching 4.5 percent compared to the projected 3.9 percent, according to WorldatWork. In Mexico, salary budget increases have been rising steadily, going from 4.7 percent in 2021 to 5.7 percent in 2022 to 6.3 percent in 2023. 

India, though, had the largest 2023 salary budget increase of all 18 countries in the survey, averaging a 9.8 percent hike. That's a slight drop from the 10.1 percent boost seen in 2022. Before the COVID-19 pandemic, India's salary budget increases hovered around 9.9 percent.

The Bigger Pay Picture

WorldatWork's survey findings are the latest to paint a picture of 2023 and 2024 pay increase budgets—both of which indicate aggressive compensation strategies.

Consulting firm Mercer similarly found earlier this year that U.S. employers reported 2023 annual merit increases have averaged 3.8 percent, while total compensation—which includes merit awards as well as all other types of compensation increases impacting base pay, such as promotional, cost-of-living and minimum wage—increased by 4.1 percent. Those are the highest increases since 2008, Mercer reported.

And while some data suggests salary budgets might slightly dip next year as inflation and the tight labor market both cool, so far employers are still forecasting big pay hikes. That's likely the result of a combination of factors, including rising employee expectations and the ongoing high cost of living.

A June report by consulting firm WTW, which surveyed more than 2,000 U.S. organizations, predicted that employers are budgeting an average salary increase of 4 percent in 2024.

And research from Seattle-based compensation software firm Payscale found that U.S. employers are budgeting for 3.8 percent pay increases next year—down slightly from this year's average 4 percent bump. While more than three-fourths of U.S. companies plan to increase salaries in 2024 at the same level or higher than this year, according to Payscale's Salary Budget Survey, the percentage of organizations expecting to lower their salary increase budgets in 2024 has risen to 22 percent from 9 percent last year.

The results of these surveys, which together largely indicate that employers will stay aggressive next year on pay, might be in part due to changing economic forecasts. Although recession fears have been widely reported, some economists now predict a soft landing for the U.S. economy, while others say the job market remains employee-driven.

WorldatWork's survey, for instance, finds that layoffs are cooling significantly. Averaged across all 18 countries, about 70 percent of survey participants reported no layoffs for 2023, with 91 percent anticipating the same for 2024.

Although the surveys of salary increase predictions for 2024 are important gauges for HR leaders planning compensation strategies, analysts say the forecasts are just that—a forecast.

"This is a bit like looking into a crystal ball," Lesli Jennings, North America leader of work, rewards and careers at WTW, told SHRM Online last month.