2023 Pay Increases Are Largest Since 2008 Crisis, Study Shows

While many employers said they were budgeting for compensation raises at the end of 2022, data from Mercer found that these same employers fell just short of those targets.  

In November 2022, employers who participated in Mercer’s U.S. Compensation Planning pulse survey reported that they were budgeting 3.9% for merit increases and 4.3% for total increases. But in March 2023, when asked what was actually delivered to employees, Mercer’s inaugural QuickPulse survey found that these employers paid out close to, but slightly below, the predicted budgets and delivered actual merit increases of 3.8% and total increases of 4.1%. 

This is still an increase from 2022, when actual merit and total increases were 3.4% and 3.8%, respectively, according to Mercer. 

“The survey indicates that employers are continuing to invest in compensation to combat prolonged tight labor markets, but they are doing this with more prudence than what we saw in 2022,” Lauren Mason, senior principal in Mercer’s career practice, said in a statement. “Despite a slight decline from November in what employers were projecting, 2023 compensation increases represent the largest increases employers have provided since the 2008 financial crisis.”  

The Mercer data come as a wage tracker compiled by the Federal Reserve Bank of Atlanta showed salaries climbing at a faster pace in March after steady growth in the prior three months. Federal Reserve Chairman Jerome Powell has also cited rising wages among the factors feeding into the price inflation the Fed has been fighting with a series of interest rate hikes. 

Earlier on in the labor shortage, Mercer found that employers were offering higher pay for new hires and making market and equity adjustments in greater numbers than before. The national average base pay change from January 1, 2022, to September 30, 2022, was 4.7%, indicating that pay was driven up by more than annual increases. 

However, the national base pay increase between October 2022 and March 2023 was only 3.4%. 

These pay raises also vary significantly by industry. Energy, life sciences and other manufacturing services all outpaced the national average for actual merit increases, with 4.5%, 4.4% and 4.4% compensation increases, respectively. Retail and wholesale and health care services lag behind, with merit increases of 3.4% and total increases of 3.6%, below the national average of 3.8%.  

“In two industries that are seriously hurting for talent, it will be interesting to see how this situation evolves,” the Mercer report stated, referring to the retail and wholesale and health care industries.  

Unbudgeted pay outside the typical merit cycle has increased in recent years, and many employers indicated in Mercer’s survey that they were making changes to manage compensation increases with additional governance.  

For instance, one in three employers said they were adding additional governance or approvals to their firms’ compensation increase processes, limiting or freezing off-cycle increases, and one in four said they are planning to do this in the future.  

Mercer also reported that more companies are choosing to be more transparent about their pay practices with employees and prospective employees. Because of pay transparency laws—which require employers to disclose pay ranges (or other salary information) to either job applicants or current employees—states including New York, California and Colorado have enacted such laws, and many companies are looking to do more than just comply, Mercer states. 

In March 2023, 44% of employers said they are complying with local legislation and have no plans to increase transparency. This figure is down from 53% of employers in August 2022. In addition, 37% of employers said in March they are exploring sharing pay ranges internally and externally in a more standardized approach, which is up from 24% of employers in 2022. 

“With recent pay transparency legislation, employees have more data than ever to assess their compensation in the external market,” Mason said. “This will continue to put more pressure on employer programs, and combined with a continued tight labor market, reinforces the need for continued focus on competitive and equitable compensation.” 

As employers continue to grapple with finding and keeping employees, particularly in sectors like health care, the Mercer report said it makes sense that organizations are setting aside the more reactive tactics of the past several years and are looking more strategically at how they will attract and retain talent. 

According to the QuickPulse survey, half of the U.S. and Canadian respondents said they plan to revisit their total rewards strategies in the next six to 12 months in order to increase their ability to attract and retain employees.  

The survey was conducted between March 13 and March 24, and 945 U.S. companies participated.