Employers expect to raise salaries for workers 4.6% in 2023, up from an average of 4.2% in 2022, new WTW data shows.

The employer pay rises are driven by companies grappling with economic challenges, as 77% react to inflationary pressures and 68% to address concerns over the tight labor market, the WTW Salary Budget Planning Report finds.

“As inflation continues to rise and the threat of an economic downturn looms, companies are using a range of measures to support their staff during this time,” said Hatti Johansson, research director for reward data intelligence at WTW, in a press release. “[Companies] should prioritize their actions based on the needs of both employers and employees and pay close attention to market data to inform any changes.”

The WTW report reveals the most prevalent actions companies have taken, are planning or are considering and if they plan not to act. Greater workplace flexibility is the most common action, favored by 67% of respondents, followed by a broader emphasis on diversity, equity and inclusion at 61%. Another 46% of firms said they have acted to improve the work experience for employees, although the specific acts taken were not specified.  

Almost four in ten employers, 39%, are planning or considering acts to improve the employee experience, while 15% reported taking no action, the report found. Companies are also making changes to health and wellness benefits—including retirement benefits and health insurance—as 41% have taken an action, 28% are planning or considering one and 31% reported not making a change, the report shows.

Employer changes to health and wellness benefits, such as retirement benefits and health insurance coverage, comprise elements of employers’ total rewards packages, according to a WTW spokesperson. Beyond benefits, 35% of respondents have not made changes to compensation programs, 36% are planning or considering to and 30% are taking no action, WTW finds.

The tight labor market was an influence for 68% of companies that increased salary budgets. Another 75% of respondents—almost three times the 2020 figure—report experiencing problems with attracting and retaining talented employees, the report shows.

With economic challenges effecting employers, 21% of companies that are increasing salaries will fund increased spending by offering compensation plans and benefit programs that employees want the most, explains Lesli Jennings, the North America leader for work rewards and careers at WTW, in an email.

“[Companies] are looking to optimize their spending on total reward programs to potentially fund higher salary budgets [by] determining which total rewards offerings have the biggest impact on employee retention, engagement and perceived value,” Jennings says. “By doing this, organizations can identify the total rewards programs that best meet the needs of their current- and near-term workforce, while delivering the highest return on investment. It requires making these decisions across the total rewards offerings—[for example] base pay, incentives, equity, health plans, retirement and flexibility [among others]—not just one in isolation.”

WTW data also shows 57% of employers addressing the competitive labor market by hiring candidates at higher levels in the relevant salary range. More than three-quarters of firms, 76%, are considering an adjustment to the salary range by increasing the range between 2% and 5%, the report finds.

Employers may want to think beyond salary raises to resolve their difficulty attracting and retaining the best and brightest workers, added Jennings in the release.  

“Employers should consider the overall employee experience and not just salary increases,” she said. “By focusing on health and wellness benefits, workplace flexibility, careers and DEI, organizations can position themselves as the employer of choice for their current and prospective employees.”

WTW also finds more than two-fifths of companies either have adjusted or are considering adjusting salaries more aggressively than in the past and roughly 90% of organizations are making or considering salary increase adjustments are doing two adjustments per year.

The Salary Budget Planning Report was compiled by WTW’s Reward Data Intelligence practice. The survey was conducted from October 3 to November 4. The report included approximately 28,000 sets of responses that were received from companies across more than 135 countries worldwide, including 1,550 organizations in the U.S.