Employers predict ‘modest’ 3.9% pay increases for 2024

Dive Brief:

  • U.S. employers are planning more modest compensation increases for 2024 than they budgeted for 2023, although next year’s budgets remain well above pre-pandemic levels, respondents told Mercer in an August compensation survey.
  • For 2024, employers said they plan merit increases of 3.5%, compared to 3.8% actual merit increases in 2023, the Sept. 25 results show. They also plan total salary increases (including promotion-related pay increases and cost of living adjustments) of 3.9% for nonunionized employees, a decrease from 4.1% in 2023, according to the report. In a reversal of historical trends — due to layoffs and financial strain — the high-tech industry has projected merit increases below the national average, at 3.3%, Mercer said. By contrast, the consumer goods, energy and insurance/reinsurance industries are taking the lead, with planned merit increases of 3.7%, slightly higher than the average. Projected budgets by healthcare services lag below the average, with planned merit increases of 3.1%, the report found.
  • These slight declines reflect “the ongoing tightness of the labor market and low levels of unemployment,” Lauren Mason, a senior principal at Mercer, said in a statement. “However, if the labor market continues to stabilize and inflation cools further as we move towards the end of the year, compensation pressures are likely to continue to decline,” Mason said.

Dive Insight:

“Cautious optimism” may be the survey’s message, as compensation budgets seem in line with Mason’s prediction that employers will have to adjust their strategies to reflect the changing economic landscape if inflation cools and the labor market returns to pre-pandemic levels.

Salary budget surveys released by Payscale in late July and WTW at the end of June suggest employers have been adjusting their 2024 compensation budgets as conditions fluctuate. U.S. employers told Payscale they expect to raise salaries 3.8% next year. According to the report from WTW released a month earlier, employers were planning annual salary increases of about 4%.

The surveys confirm that employers remain concerned about staying competitive amid skills shortages in an ever-changing work environment. As of Mercer’s September report, the labor market was still extremely hot — short 3 million workers (the gap between the number of job openings and unemployed workers), the firm pointed out.

Even so, promotions aren’t expected to play as big a role next year in total rewards packages, the report showed. Employers plan to promote 8.7% of their employee population in 2024 and spend 1.1% of their compensation budget on related pay increases, according to the August 2023 survey.

By comparison, in an August 2022 survey, employers said they expected to promote more than 10% of employees for 2023 and allocate 1.3% of their salary budget to do so. “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,” Mercer said.

However, nearly all (85%) of the 900 responding organizations of all sizes (fewer than 500 employees to over 20,000) said they were only in the preliminary stages of developing next year’s budget, Mercer found. 

The survey also revealed that in 2023, employee base salaries increased 5.6% on average, despite merit increase budgets of 3.8%, Mercer said. The difference was due to off-cycle increases, which nearly 6 in 10 employers reported providing. Employers said they used these increases to address retention concerns, counteroffers, market adjustments and internal equity, the firm noted.

Companies told WTW in 2022 they planned to fund projected 4.6% pay increases for 2023 by adjusting compensation and benefit plans, increasing prices and through company restructuring and staff reductions.

Going forward, Mason offered a key tip: When planning for 2024, it’s crucial for employers to “move away from the reactive approach of the past few years and adopt a more strategic approach.” This, she said, will enable employers to “focus their compensation investments on the most critical attraction and retention segments of their workforce, while also ensuring that pay increases are distributed fairly and equitably.”

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