Four Themes Impacting 2023 Compensation

The past few years have certainly been eventful, from both a talent and rewards perspective. The intersection of a global pandemic, world political and supply chain disruptions, shortage of talent, and raging inflation present difficult terrain to manage for both employers and employees. 

In 2023, employers will continue to face significant pay challenges: a competitive talent landscape, an exhaustive workforce, and pressure to control costs amid a potential economic downturn. How employers respond could determine whether they are an employer of choice. 

So, what should employers be thinking about to address these complexities? Lappley & Associates research and consulting experience point to four themes that will impact compensation for 2023 and beyond.

  • Determining and implementing compensation strategy short term.
  • Embedding pay equity principles in rewards programs.
  • Being transparent in pay management.
  • Making rewards communications more effective.

These four trends are explored below in this month’s newsletter.

Update: 2023 Compensation Budgets

Faced with uncertainty over inflation and a possible recession, most companies plan to raise salaries, but not enough to keep up with the cost of living according to a recent Korn Ferry pulse survey focusing on compensation and rewards strategy. Survey participants reported that companies are planning 2023 wage increases of between 4% and 4.5%. This is consistent with our November newsletter that summarized several surveys reporting on 2023 anticipated compensation increases.  

And while wage increases are going up, they still trail the inflation rate. It seems that a number of companies are taking a wait-and-see approach so that they don’t lock in costs that lead to layoff recession hits. While hiring has softened a bit in the past couple of months, there are nearly two times as many jobs available as there are people to fill them. In addition, recent communications by the International Monetary Fund (IMF) suggest that, forsaking major international events, the U.S. economy will, at worst, face a mild recession. It’s still a workers’ labor market. 

While companies balance the costs and returns for increasing salaries, including differentiating increases between excellent and long-term employees, funding equity increases, and addressing competitive practice for high-demand positions and high-potential employees, they often continue to utilize hiring and retention bonuses. 

Pay Equity

While many organizations conduct pay equity audits to ensure that pay outcomes don’t appreciably vary between gender and race groups, a great deal don’t go beyond these initial efforts. Inclusive organizations are insisting that their rewards programs are inclusive, as well. This expands a narrow focus on statistical analysis to include the following.

  • Inclusive contributions incorporate a belief that rewards are an investment and not simply a cost. This approach incorporates leaders including underrepresented talent, along with other stakeholders, to be part of design thinking. This fosters alignment and a feeling of ownership across the organization.  
  • Expand statistical assessments to include overall pay gaps across all employee groups.
  • Establish metrics and processes to measure accountability.
  • Setting up rewards processes that support pay equity, including hiring, promotions, and development.
  • Optimizing the balance between freedom and framework, ensuring that management discretion has appropriate guiderails to minimize pay-equity risk.
  • Education for all employees including managers who are at the forefront of inclusion administration.

Pay Transparency

A new pay equity focus is being enforced by regulatory progression. Several U.S. jurisdictions (e.g., California, Colorado, Connecticut, Washington, and New York City) have recently passed laws requiring organizations to disclose salary ranges for job postings. That follows many jurisdictions that don’t allow asking recruits for their salary history. Passage of these laws will likely drive disclosing pay ranges nationally. 

Disclosure of pay ranges aims primarily to reduce pay inequalities for underrepresented groups. However, recently newly hired employees have often leapfrogged incumbent employees into higher paying jobs creating equity issues and concerns about employee engagement, loyalty, and disillusionment leading, of course, to their leaving the organization.  

Organizations facing this new legislation need to reexamine the design of their compensation programs. This process starts with a review of the purpose of the organization’s rewards strategy, followed by ensuring that logical rewards processes and structures are in place, and that the rewards programs are aligned with the business.

Following reexamination of rewards design, it must be communicated to all employees. Rewards should not be seen as a black box. Communication elements include strategy intent and alignment with organization purpose, determination of job grades and titles, competitive benchmarking, and how individual performance is rewarded.

Robust rewards program design enables companies to have a good story to tell which they need to share effectively and transparently.

Pay Communications

Rewards convey a very loud message to employees about the organization’s values, culture, and character. It may be the loudest day-to-day message an employee receives. Employees have become more discerning and demanding than ever with high expectations of their employer which have increased during the ongoing talent shortage. It has become more complex with expanded employee expectations such as linkage of employee and employer purpose, fairness, and the ESG agenda. 

Therefore, it is imperative to deliver a highly regarded reward to employees with effective communications. Marketing plays a pivotal part. To the extent possible, communications need to be personalized, or at least segmented, based on employee needs. If achieved successfully, it is a competitive advantage.  

The key to communicating compensation centers on managers. A majority of employees say their manager is their direct link to their organization. But people managers are struggling to balance their employee expectations of purpose, flexibility, and career opportunities with performance pressures from senior management. In 2023, managers need to provide support and education to bridge the widening skills gap, while clarifying the linkage between company goals and employee compensation. 

Contact Us

Contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com to discuss 2023 compensation challenges and trends. 

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