3 tips for preparing compensation plans for an uncertain 2023

The unique state of the labor market is making for a lot of firsts in the world of compensation, and some employers have proven more ready than others.

While employees are engaged in the “Great Reshuffle” — the trifecta of unprecedented quit rates, hire rates and salary increases — a recession is looming on the horizon, leaving employers stuck between a recruitment and retention rock and a hard place. Should they continue boosting salaries to drive recruitment and secure employees, or is it time to batten down the hatches?

Here are a few ways employers can prepare compensation plans amidst the uncertainty of 2023.

1. Keep wage increases competitive in 2023. Though the economy is fraught with uncertainty, compensation increases will continue, and employers must react.

Throughout 2022, record inflation spurred turnover as employees pivoted to higher paying jobs with better benefits and increased flexibility. Though several factors have played into these decisions, pay remained one of the top reasons for leaving. Why? Raises just weren’t keeping up.

A July 2022 study from the Pew Research Center reported that employees who stayed with their current employer were less likely to increase their earnings than employees who switched jobs. Competing offers have historically outperformed raises, but 2022 saw record increases for job hoppers, motivating employees to make moves.

If employers want to compete for talent in 2023, they must prepare with a larger salary budget than seen in 2021 and 2022. According to a 2023 salary budget survey by XpertHR, next year’s average salary increase is projected to be 4.7%, with 13% of surveyed employers planning to increase salaries by more than 8%.

2. Don’t have funds to increase wages? Consider other pay options. Certainly, employers want to retain top talent. But not all employers can meet salary expectations amidst mounting signs of a recession. For these employers, it’s essential that they find other ways to attract and retain employees. Below are a few options.

One option is to increase variable pay in lieu of salary increases. Variable pay helps employers manage risk by tying compensation directly to performance. This way, employees earn more if they perform well for the company.

Another option is to offer employee bonuses for specific goals. Such bonuses may be used for:

• Student debt repayment
• Tuition reimbursement
• Industry certifications
• Down payment for a home
• Family forming

Goal-specific bonuses will remove specific financial stressors from employees’ plates and allow them to focus on the future and gain experience in the industry.

Finally, employers may also consider offering equity compensation. Through equity compensation, employees become invested in the company’s success and employers can increase total compensation without increasing wages.

3. Shift focus towards robust employee benefits. Though the U.S. economy bounced back in the third quarter with a Growth Domestic Product increase of 2.6%, a recession is still likely. If a recession occurs, employers must consider new, affordable strategies to attract and retain talent.

One tried and true way to do this without breaking the bank is to invest in robust benefits. However, in today’s market, employers must go beyond building the ordinary benefits package to be successful. Below are some key actions to consider.

Employers can reduce costs by designing a benefits plan that maximizes pre-tax contributions, optimizes value, and lowers an employee’s taxable income. Pre-tax benefits may include:

• Medical, dental and vision
• Group-term life insurance
• Flexible Spending Accounts
• Childcare expenses
• Health Spending Accounts
• Retirement benefits
• Tax-deferred investments
• Student loan repayments
• Commuting and parking programs

Before choosing pre-tax benefits, employers should investigate their workforce. Who has caregiving responsibilities? Where do they live? Do they want to start a family? Who has student loans? Who is near retirement?

Employers can also invest in comprehensive employee wellness plans to improve employee health and engagement while reducing certain costs, such as health care costs. Employee wellness includes the employee’s mental, social, emotional, physical, and financial health.

As part of a wellness plan, employers can offer free financial wellness programming, free wellness app subscriptions, discounted gym memberships, or social events and volunteer opportunities for employees.

Like most other costs, health care premiums will not be immune to rising inflation. To manage increasing health care costs, companies should consider cost management strategies, such as:

• Tiered health plans
• Telehealth options
• Working spouse rules
• Regular plan eligibility audits

Finally, employers looking for more drastic recession measures may consider increasing flexible work options, such as work-from-home, remote work, “work from anywhere,” part-time work and PTO purchase options.

Related: Meeting the expectations of a changing workforce, improving opportunities, and upward mobility for workers

While recession and inflation worries will continue in 2023, compensation will increase. Now, employers must decide what’s most feasible for their workforce and their business. These three tips will help.

Natasha K. A. Wiebusch, J.D., Legal Editor, is a former practicing attorney, HR compliance and training specialist, and content marketer. At XpertHR, she covers various topics, including benefits, compensation, workplace flexibility, and the future of work. She can be reached at Natasha.Wiebusch@xperthr.com.