Employers are dialing back their salary budget increases this year, according to Mercer, from initial projections of 3.8% in November to a current average of 3.6%. This adjustment reflects a perceived sense of stability in contrast to the job market turbulence experienced during the “Great Resignation” phase of the pandemic.
Additionally, companies are scaling back their promotion plans, with only 8% of the workforce slated for promotion in 2024, down from 10% last year. For those who do get promoted, the average pay increase has dipped slightly from 9.4% in 2023 to 9.2% this year, as per Mercer’s survey findings.
Michael Citron, a compensation and rewards consultant at Mercer, noted that while there’s a slight decline in preliminary compensation budgets for 2024, they still remain notably higher than pre-pandemic levels. This underscores the ongoing tightness of the labor market and persistently low unemployment rates.
The report on slower salary increases comes amidst recent data from the Commerce Department, revealing a less-than-expected 1.6% expansion in the economy last quarter, with personal spending increasing by 2.5%. Inflation figures also surpassed expectations, with the core personal consumption expenditures price index rising 3.7% last quarter, well above the Federal Reserve’s 2% target.
Scott Hoyt, senior director at Moody’s Analytics, believes inflationary pressures may ease over time, but until then, risks remain. The Federal Reserve has signaled its reluctance to adjust interest rates until inflation convincingly returns to its target level.
Despite robust labor demand evidenced by a significant increase in payrolls and a decrease in unemployment, there are signs of a softer labor market, such as a decline in the quits rate, according to the Labor Department.
While pay gains have outpaced inflation over the past year, there’s still a potential need for employers to ramp up pay raises in the coming years, especially with emerging trends like pay transparency legislation and minimum wage increases, which may continue to exert pressure on wages.
Many companies are prioritizing market alignment in their compensation strategies to ensure competitiveness and retain top talent. Budgeted merit increases vary by industry, with transport and equipment companies planning average gains of 3.9%, while the healthcare service, retail, and wholesale sectors budget for an average increase of 2.9%, according to Mercer.