2023 Salary Increase Budgets Projected to Be the Highest Since 2001

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The Conference Board 2022–2023 US Salary Increase Budget Survey finds that US employers adjusted their total salary increase budgets for 2022 upward. Employers originally planned for a total salary increase budget of 3.6 percent of total payroll in 2022, but the actual total salary increase budget rose to 4.1 percent. The total salary increase budget for 2023 is projected to rise even further, to 4.3 percent (see Chart 1).

The projected increase for 2023 would be the highest since 2001, when salary budgets also increased by 4.3 percent (see Chart 2). Compared with the last 10 years, salary increase budgets are now significantly higher.

Insights for What’s Ahead

• Wage growth may remain elevated through the first half of 2023 but could decelerate thereafter. Economic activity is expected to decelerate toward the end of 2022, and it is increasingly likely that the US economy will fall into a recession by year-end or early 2023. A slowing economy and cooling labor market would translate into reduced employer demand for new workers and potential layoffs. In such an environment, employee bargaining power may weaken, resulting in reduced wage pressures.

• Driven by structural trends in the US labor market, wages may grow faster over the next decade compared with the previous one, and lead to a future of tight labor markets. Weak growth in the US working-age population, less international immigration, and stagnant labor force participation are squeezing labor supply. Lackluster productivity growth over the last decade and since the outbreak of the pandemic shows that automation has not yet been able to offset weakening labor supply.

• While the total salary increase budget for 2023 is projected to reach 4.3 percent, employers are watching trends in the labor market, the economy, and their own companies carefully, and may adjust this number downward in Q4 2022 to reflect broader economic developments, including a worsening economic outlook. However, continued hiring and retention difficulties could force employers to stick with their current salary budget projections.
   
• Salary increase budgets alone do not tell the full story, as employers are using other levers in addition to base pay increases, such as more short-term incentives and other total rewards components to create competitive and meaningful packages. Survey respondents report greater use of other compensation elements that are not included in salary increase budget numbers, such as sign-on bonuses, retention awards, and expanded inclusion of employees in short-term incentive plans to attract and retain workers without increasing fixed wage costs.

Chart 1: Employers have adjusted their 2022 total salary increase budgets upward, and project even greater increases in 2023

Chart 2: Total salary increase budgets for 2023 are projected to be the highest since 2001

These findings underscore the current tight labor market. Wages have risen across the US economy in reaction to strong labor demand and limited supply. Difficulty in attracting and retaining workers, rising local prevailing wages, inflation, and other economic pressures have prompted employers to significantly increase their salary budgets.

Employers also report that they have taken, and may continue to take, special actions such as accelerating the timing of increases, adding off-cycle increases, bonuses, and stock grants to address these pressures.

The 2022–2023 survey shows that employers hiring hourly workers—often those performing manual labor and manual services (e.g., production, transportation, repair, food services, and personal care)—bore the brunt of the labor market pressures in 2022. Salary increase budgets for nonexempt hourly workers rose from an originally planned 3.5 percent increase to an actual increase of 4.2 percent in 2022 (see Chart 3).

Although salary increase budgets show a similar rising trend overall, results by employee group show that projected 2023 increases for executives are slightly lower than those for other employee groups.

While 47 percent of survey respondents say that their 2023 projected salary increase budgets are firm or likely, employers are carefully watching trends in the labor market, economy, and their own companies, and may adjust their salary increase budgets in the fourth quarter of 2022 to reflect changes in the economy or labor market. A worsening economic outlook may lead to downward revisions; on the other hand, continued hiring and retention difficulties could force employers to stick with their current salary budget projections.

Chart 3: Actual salary increase budgets for hourly nonexempt workers were adjusted upward the most

However, salary increase budgets do not tell the full story. Survey respondents report greater use of other compensation elements that are not included in salary increase budget numbers, such as sign-on bonuses, retention awards, and expanded inclusion of employees in short-term incentive plans to attract and retain workers without increasing fixed wage costs. For 2022, 64.3 percent of respondents report that some or all of their nonexempt hourly workers were eligible for short-term incentives. Even more employers report short-term incentive eligibility for nonexempt salaried workers (74.4 percent), exempt workers (88.3 percent), and executives (90.7 percent).

Since 1985, The Conference Board has surveyed compensation executives about salary increase budgets. The Conference Board requested data for four employment categories: nonexempt hourly (nonunion), nonexempt salaried, exempt, and executive. Two hundred and fifty organizations completed the survey, which was fielded between June 30 and July 29, 2022. More than half of respondents came from companies with more than 10,000 workers.

Salary increase budget—Refers to the pool of money that an organization dedicates to base pay increases (base salary or hourly rates) for the year. It is generally represented as a percentage of payroll; the salary increase budget is calculated using a predetermined total percentage of base pay (excluding overtime, bonuses, etc.). The budget is generally the total amount allocated for all merit or performance increases to individual employees, as well as other pay increases. 

Short-term incentives—For the purposes of this survey, short-term incentives includes regular individual or group cash incentives or bonuses covering a period of one year or less. It does not include spot awards, sales commissions, stock awards, and other recognition awards.