Employers expect to spend less on compensation in 2023, says report

If the Great Recession taught employers anything, it taught them of the desire of employees to find work on their terms that meet their needs. As the pandemic moved into a more settled state, employers were faced with the prospects of jobs to offer but no one to fill them.

Attracting and retaining employees has always been top of mind but these past two years has shone a brighter light on the issue. A new report from Gallagher, the 2022 U.S. Career Wellbeing Report, shows that nearly 8 in 10 employers (78%), increased base salary for FY 2022 at nearly two times the rate of other total rewards to attract workers. This exceeds average total proposed increases for FY 2023, which range from 3.4% for executives to 3.6% for other employee groups.

It would seem that employers are focused more on merit increases as well as sustaining engagement. However, there is more to a rewards package than simply pay hikes.

“Higher pay on its own isn’t likely to sufficiently and sustainably raise engagement levels or lower turnover rates. Employers need to develop a total rewards package that includes employee well-being programs that align with organizational priorities,” notes William F. Ziebell, CEO of Gallagher’s Benefits & HR Consulting Division.

The report also shows that promotional salary increase budgets grew 0.7 points (3.8%) from FY 2022 and projections for next year are similar at 3.7%. The most popular salary increases include merit increases (76%) and market adjustments (68%) and about one in three employers have budgeted for salary range (33%) or internal equity (32%) adjustments in FY 2022.

“Compensation, benefits and flexible policies and practices work better together when they address engagement drivers and retention,” adds Ziebell. So evaluating the drivers of workforce engagement and retention, understanding how they differ and implementing a supporting strategy is a key component of success. The more they closely align, the more likely they are to support work-life balance. In addition it creates a more rewarding employee experience, which is a win-win for all.”

Engagement is also an important part of employers’ current toolbox when looking at their current talent pool. For example, 48% of the companies questioned survey employees to measure communication success – a jump from 41% in 2019. Moving forward, another 21% expect to do so, a three-percentage increase from last year. Not surprisingly, larger employers (67%) are twice as likely to conduct an engagement survey than smaller employers (33%).

Related: Benefits beyond the basics: What’s needed to retain top-tier talent

Also, 46% communicate in a way that fosters trust and confidence, 44% give timely and constructive feedback, 43% define clear performance goals, 41% support employees in developing their career paths, and 38% provide performance-based recognition.

Employers are also dealing more with remote workers than in previous decades. However, the report shows only 12% are considering alternative pay practices for those workers and only 2% have actually changed the compensation structure.

“Many employers are now paying more for the employees they have and those they want in the midst of price inflation and an extremely competitive labor market,” adds Ziebell. “While compensation is the key bargaining chip when attracting and retaining employees, market-driven increases may bring financial consequences for employers and their customers.”

The report notes that employee incentives apply more often to executives (37%) and management (34%) then they do to employees in other exempt (29%) or non-exempt (26%) roles.

Average base pay used for variable compensation in FY 2022 is 25% for executives, up from 21.8% in FY 2021. For management, the average base pay used to determine variable pay is 13.2%, up from 12.5% in FY 2021.

Looking to FY 2023, initial plans for variable pay incentives either remain the same as last year (62%) or are not yet determined (21%).