6 Things HR Needs to Know About Employee Compensation in 2023

Pay transparency and equity are hot topics now, and for good reason. The pandemic ushered in the adoption of remote work and forever shifted the balance of power between employers and employees. States introduced legislature that disallowed employers from asking for candidate salary history and enacted laws demanding organizations communicate salary ranges for open positions. Employees are demanding greater pay transparency, and organizations are taking a closer look at pay equity.

As an HR pro, you will be tasked with identifying, analyzing, and proactively ensuring fair and equitable pay practices. To stay competitive, what specific compensation trends do you need to be aware of in 2023? That’s the question we aimed to answer with our annual Pay Equity Pulse Surveys, which give insights into how employees and employers feel about a range of compensation-related issues.

Let’s take a closer look at the latest stats on topics like pay equity, cost of living adjustments (COLA), national salary budget trends and more, and explore the key takeaways HR professionals should glean from these survey results.

Pay Equity: Much Room for Improvement

The pay equity survey results found common themes from employees – namely, that they have concerns about pay transparency and their compensation compared to others.

The stats

• 85% think employers aren't very clear at all about how employees are paid.
  • Many indicated that their managers couldn’t effectively answer their compensation questions.
• “Organizational culture” and “flexibility in when and where to work” were ranked second and third in respondents’ list of top considerations when evaluating employment options.
• Nearly 50% of employees don't feel that they're paid fairly compared to their peers in other companies, and more than one-third feel the same when compared to their internal colleagues.

The takeaway for pay equity

“Overall, culture and flexibility – and where and when to work – are very highly valued by employees. The pandemic opened the door and created a new opportunity for both employees and employers to recognize that working remotely is possible and can be a win-win situation. More freedom can result in greater productivity, a healthier work-life balance, and consequently, a reduction in stress,” said Amy Sica, Senior Compensation Consultant at Salary.com.

Sica suggests that employees are forward-looking and have a vested interest in ensuring they have a future that includes opportunities for advancement – so the fact that managers can’t answer salary questions is likely to cause frustration and disengaging. Greater pay transparency – where managers can freely and confidently discuss compensation with their subordinates – will go a long way toward helping create an environment where employees feel more informed and more in control of their career and their future.

See how employers responded to pay equity survey questions here.

Cost of Living Adjustments: Growing Employee Anxiety

The ever-increasing cost of living also weighed heavily on the minds of our survey respondents.

The stats

• 99% of survey respondents said they’re somewhat or very concerned that rising inflation rates are eroding employee compensation.
• Only 19% of companies have a separate COLA budget this year.
• Nearly three-quarters (73%) of employers are targeting 4% of their budget or more for merit increases.
• To respond to inflationary pressures and the demand for talent:
  • 34% of companies are offering signing bonuses.
  • 25% are offering training programs as incentives.
  • 44% are updating their salary structures.
• Wage transparency regulations have led to about one-third (34%) of respondents now posting salary ranges on requisitions.

The takeaway for cost of living

Anxiety about growing costs is making everyone nervous, including employees who thought they made a good salary – and as a result, employees are speaking out and pushing employers to respond. Sica said the number of companies posting salary ranges will soon go much higher than 34% as potential employees demand greater transparency. And while only 19% of companies have a separate COLA budget, organizations are responding in many other ways, such as updating salary structures and offering sign-on bonuses, merit raises, and professional development opportunities. “These are all great ways to respond to what employees tell us they value,” Sica said.

Recruiting Markets: Stiff Competition for the Best and Brightest

Given the current economy, how are recruiting markets changing? Spoiler alert: employers are having a tough time finding talent.

The stats

• 82% of companies say they're having difficulty attracting qualified candidates.
• 56% of companies are having challenges filling job openings.
• Competition for scarce talent is driving up the cost of labor.
  • 33% of companies have increased their compensation offers by 5-10%.
  • 41% of companies have increased their compensation offers by 10-20%.

The takeaway for recruiting markets

It’s no secret that we’re in an extremely tight labor market – unemployment rose to nearly 15% at the height of the pandemic and is now down to about 3.7% or 6 million people. With the scarcity of talent driving up the cost of labor, employers are battling for the same best and brightest employees.

“We see many organizations employing strategies like sign-on bonuses, unlimited PTO, professional development opportunities including sponsoring employees for certifications in their career, and tuition reimbursement to help employees get their degree or gain a higher degree,” Sica said.

But don’t make the mistake of overlooking your current employees.

“With starting salaries increasing by 10 to 20%, leadership and HR professionals must also consider their existing workforce – identifying any potential compression issues resulting from those higher starting salaries. Addressing compression can be very costly and difficult to sustain financially for an organization. However, if it’s not addressed, compression can lead to turnover, which starts a vicious cycle. Employers will need to strategically balance their budgets, and find ways to attract, motivate, engage and ultimately retain employees,” Sica said.

DE&I Trends: Improving, But Still Room for Growth

Survey results show that diversity is becoming a strategic mission for organizations, but there’s a gap between diversity intention and action.

The stats

• 46% have a diverse executive team, up 6% over the previous year.
• 65% agree or strongly agree that they have proactive initiatives in place for DE&I.
• 90% intend to promote a culture where employees feel supported and empowered to speak up, while 75% agree or strongly agree that their employees do speak for themselves and feel supported.
• 49% have someone specifically dedicated to leading DE&I initiatives.

The takeaway for diversity, equity and inclusion

While organizations are placing more of an emphasis on diversity, the gap between the percentage of organizations that want to support a supportive employee culture and the portion where it’s actually happening in their organization shows that there’s still work to do.

Overall, organizations are making slow but steady progress when it comes to DE&I.

“Like with pay equity, the challenge is with the transition from intentions to actions,” Sica said. “And it's very likely that priorities were shifted as a result of the pandemic, and attention was redirected. Many initiatives – including DE&I initiatives – were likely placed on hold, but it appears they have been renewed. I anticipate seeing more of those intentions turned into actions in the coming year.”

National Salary Budget Survey: Budgets are Increasing

Unsurprisingly, the headline here is nearly half of companies are increasing salary budgets.

The stats

• 48% of companies in the U.S. say their budgets will be higher or significantly higher than the year before.
• 14% say their salary increases will be lower than the year before.
• The median raise rate in the U.S. is 4%, up 1% from the previous year and higher than the planned raise of 3.2%.

The takeaway from the national budget survey

It will be interesting to see what 2023 actual raises are compared to planned, particularly if economic volatility continues. Even if we expect inflation to drop significantly, the data suggests we will probably still see 4% raises due to the tight labor market.

Survey findings indicate that the 4-5% planned increases hold steady across job categories, from hourly employees to the executive level. This continues the noticeable shift in salary budget increases seen last year.

“Before last year, we hadn't seen this in the previous ten years, particularly for hourly employees who have had to deal with stagnant pay for a long time. Minimum wage legislation is a big factor, but the re-emergence of lower-level workers shows that they have market power. Aging baby boomers and pandemic-related worker shortages have also contributed to the situation, so we have more jobs and more people willing or able to work,” Sica said.

Another key finding is that smaller companies are planning higher budget increases than their larger counterparts.

“It's really hard to know for sure why this is happening. For larger companies, it could be a cost factor: more employees equals more cost. One could argue that they are probably making more in revenue, so that may negate that theory. But perhaps they're using other reward methods like professional development incentives and other types of compensation that are not base pay. For smaller companies, it could be that there's a more direct and closer relationship between employees and managers – fewer levels of hierarchy,” Sica said.

Remote Work: Companies are Open to It

Just five years ago, working for a company across the country or the globe may have seemed like an impossibility, but the pandemic opened the door to remote work in a big way.

The stats

• 29% say they have employees working in one or more different geographic areas.
• 93% indicate they're open to employees asking to relocate and go 100% remote.
• Of the companies that indicate they’re somewhat or very flexible to remote work requests, 76% don't adjust pay based on the employee’s home location.

The takeaway for remote work

“Remote work is here to stay and valued by both employees and employers – it's a true win-win situation. We’re often asked how to pay remote workers. Should we pay them based on their home location or the location of our headquarters? Should we offer premiums for employees in higher-cost-of-living locations? Companies will have to make very strategic decisions, and it goes without saying that whatever strategy you choose, you should apply it consistently to avoid any equity issues,” Sica said.

Conclusion: Compensation Will Be at the Forefront in 2023

It’s quite possible that 2023 will be the Year of Pay Transparency. The combination of new laws on the books, legislation in the works, and the very fact that many companies have employees in several states should lead to new, more transparent pay practices. How will that, in turn, affect pay equity, raises, or possibly lead to pay compression?

And how will the labor shortage and the percentage of under-employed workers affect recruiting and hiring highly skilled employees?

For a deeper dive, we asked the experts about these trends during a recent webinar – Compensation Trends that Will Impact Your 2023 Planning.

Watch the recorded webinar here.