As Inflation, Job Market Cool, Employers Eye Smaller Raises in 2023

​Organizations are still prioritizing salary increases as a competitive strategy in 2023—but perhaps not as much as they did in 2022, when inflation and the job market were both red-hot.

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Fewer organizations plan to give base pay raises this year, with 80 percent of organizations saying they plan to do so in 2023, according to new data released this week from Seattle-based compensation software firm Payscale. Ninety-two percent of organizations gave raises in 2022. For its annual Compensation Best Practices Report, Payscale surveyed roughly 5,000 participants between October 2022 and December 2022.

"Companies were playing catch-up last year [in regards to pay]," Lexi Clarke, vice president of people at Payscale, said during a press call last week discussing the results. "That being said, as inflation starts to ease, as the job market cools a little bit and as comp strategies are more set in place in different organizations, we'll start to see those raises really stabilize from last year's payouts as companies become a little more cautious with the uncertainty around economic outlook."

Employers also are generally eyeing smaller raises in 2023 than they did last year. While most organizations (56 percent) say that average base pay increases will be over 3 percent, up from 53 percent that did so last year, the average raise is likely to be lower this year than in 2022, when more organizations gave raises of more than 5 percent, the survey finds.

"In 2022, we saw most raises above that 5 percent number," Clarke said. "So we are seeing a shift in numbers this year."

While pay increases will likely not be as aggressive this year, the amount of organizations that give formal pay increases twice annually has more than doubled since last year, Payscale analysts noted, with 86 percent planning to give raises out of cycle due to inflation, the rising cost of living and preparation for pay transparency. 

Push-Pull Over Pay

Employers' compensation plans as highlighted in the new data come during a precarious time for company leaders, who are navigating how to lure potential talent and keep employees put while staying in the black as fears of a recession loom. Some firms, particularly in the tech industry, have cut thousands of jobs, and overall voluntary employee turnover is trending downward—dropping 11 percent in the last year from 36 percent to 25 percent, Payscale finds. Despite this, employers are still worried about labor shortages, with 60 percent of organizations telling Payscale they experienced worker shortages and had more trouble attracting and retaining talent in 2022 than in previous years.

At the same time, employers are using pay increases to stabilize and help workers left struggling financially as a result of unrelenting inflation, which has resulted in more workers living paycheck to paycheck, dipping into savings and stopping contributions into their retirement accounts.

Pressures, though, were perhaps more intense last year: Inflation hit a more than 40-year-high in June, and the labor market was employee-driven, with workers quitting in record numbers in search of higher pay, enhanced benefits and better work-life balance. Although those pressures remain, things are abating slightly: While pay raises are still significantly trailing cost-of-living increases, inflation's rise has been cooling over the last several months, according to the U.S. Bureau of Labor Statistics' Consumer Price Index. And voluntary turnover has abated as well.

That push and pull between what employees are looking for in compensation and where employers will invest is continuing to play out, with 55 percent of organizations saying that compensation tops the list of what will be most challenging for HR in 2023, just below recruitment (58 percent).

"After all that we experienced in '22, we can clearly see that compensation still stands out as the overriding concern [for employers]," said Ruth Thomas, pay equity strategist at Payscale.

Pay Transparency

Aside from strategizing pay increases this year, employers are increasingly prioritizing pay transparency, Payscale research shows. The number of organizations including pay ranges in job postings has more than doubled since last year—from 22 percent who included salary ranges in postings in 2022 to 45 percent that said they currently include pay ranges.

"Obviously the pay transparency legislation has a big part in forcing organizations to be more transparent about their pay and job postings," said Lulu Seikaly, senior corporate employment attorney at Payscale. "But we also see the social pressures of the Tik Tok and Gen Z generations who are speaking out much more vocally on social media, saying to their employer, 'This isn't taboo anymore. We should be talking more openly about pay.'"