And they might not be what you expected
One thing is for certain, when you ask a compensation professional in August what their annual increase budget will be for 2024, most of them are just giving you an educated guess. In the recently published Compensation Planning Survey, part of Mercer QuickPulse™ survey series, 85% of respondents in the US indicated that they are only in the preliminary phases of budgeting. This is consistent with what we’ve heard from respondents for the past couple of years. We’ve now come to expect that budgets won’t be (close to) final until December or even January for companies on a calendar fiscal year. It will be interesting to see what organizations report in our next version of this survey, which will be conducted at the end of October and published in December.
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Decrease in projected budgets
When asked what they plan to budget for 2024, respondents reported a decrease in the size of the average projected annual increase budgets for both merit and total increases compared to 2023. On average, organizations indicated that they are projecting 3.5% for merit increase budgets and 3.9% for total increase budgets, compared to 3.8% and 4.1%, respectively, for 2023.
Our tracking of labor market indices show that the labor market is stabilizing — job growth, hiring, and quit rates are returning to prepandemic levels. However, it’s still an extremely tight labor market, as the labor market is short nearly 3 million workers (the gap between the number of job openings and unemployed workers), compared to just north of 1 million in the prepandemic hot job market. As we look towards the end of the year, if the labor market continues to cool, we may see reduced pressure on compensation budgets.
Healthcare Services looks as though it will lag other industries, projecting the lowest merit increase budget of 3.1%. Interestingly, High Tech is now on the lower end of merit increase budgets, coming in at 3.3%, along with Other Manufacturing. Several industries, such as Energy and Consumer Goods, are planning their merit budget to be above the national average, projecting 3.7%.
Other increases
Overall, the use of pay increases to respond to labor market pressures has slowed down. Organizations are using off-cycle increases less frequently, though they do continue due to counteroffers, compression, and other equity or market competitiveness concerns.
With the focus on strategically crafting the employee experience and identifying the right levers in the total rewards packages, are promotions playing a bigger role? In the August 2022 version of the Compensation Planning Survey, employers expected to promote 10.4% of the employee population and allocated 1.3% of their salary budget to do so. This year when asked the same question, employers reported that they expect to promote 8.7% of the employee population and spend 1.1% of their salary budget. It’s not a huge change, but it does look like employers are planning to promote a smaller population and allocate less of their budget.
Pay transparency
Pay transparency seems to have been replaced in the headlines with return-to-office announcements and the corresponding employee pushback, but it’s not something that employers should let slip into the background. Proactively embracing pay transparency and developing an approach that will put you ahead of required federal or state actions is the approach that Mercer consultants are suggesting to their clients. Not only will the proactive action help you get ahead of future legislation, but pay transparency promotes a culture of trust, increases employee perceptions of fair pay, is critical in attracting candidates, and ultimately drives higher levels of commitment and engagement.
In reality, it seems that many organizations are taking a less proactive approach — only 30% agree they have embedded transparency as a part of their reward and talent philosophies and 50% have no plans to go farther with pay transparency than required by local law.
What’s next…stay tuned
Over the next couple of months, organizations will start to develop their annual increase and promotional budgets as well as make plans around things like salary structure adjustments. As you know, the results of surveys like this one as well as those from organizations like SHRM and WorldatWork are inputs that compensation professionals use to develop their budget recommendations, even though we know the results only represent preliminary numbers. We suggest you gather as much market data as you can about businesses that have a similar talent pool to get a good understanding of trends in your industry and the regions in which you do business. Take that information and marry it up with your unique talent and total rewards philosophy, along with your business and financial outlook. When you have the full picture, you can put together a recommendation that is more likely to complement your efforts toward rewarding, retaining, and motivating your employee population.
