Salary Hikes: Hefty, But Are They Enough?

Despite the sinking economy, almost half of firms plan to boost salaries next year. But will that attract the talent firms need?

It would be logical to assume that the strong raises of the past two years are over. After all, the economy is sinking, inflation is high, and the markets are tumbling. But there’s one other hitch that continues to play a big role in the compensation game these days: the need for specially skilled talent.

To meet this need, almost half of US employers say they plan to increase their salary budgets for 2023, according to the employee-compensation platform About one-quarter of employers plan to raise salaries next year by between 5% and 7%. More than 1,000 employers surveyed across twenty industries said they're planning for a median pay bump of 4% in 2023 to address inflation and a higher cost of living. That's comparable to increases for 2022, the companies say.

In the short term, low unemployment continues to work in favor of savvy job-seekers who want a raise or a more fulfilling or responsible position. The troubled economy is still growing faster than the available workforce, which means there are more jobs than people to fill them, says Nathan Blain, Korn Ferry's global lead for optimizing people costs.

Companies that aren't as attractive to the most highly coveted job-seekers may need to consider retraining their existing workforce to meet business demands, Blain says. Another option is to "acqui-hire" firms that already have the sort of workforce a firm needs. Otherwise, companies should be prepared to pay more for talent. Corporate profits are at an all-time high, Blain notes. "There's money there, and there's a need there," he says. "What we're seeing a little bit is companies spending on the talent that they need, which is scarce."

Workers are expecting higher compensation, and in many cases are landing signing bonuses and other perks to join sectors with labor shortages, ranging from public transportation to healthcare and tech. In July, a survey by the Federal Reserve Bank of New York found that job-seekers were rewarded with average pay increases of 6.4%, compared to 4.7% increases for those who didn’t hop jobs. The gap is the largest in two decades, the survey found. “There's plenty of evidence that people who move jobs get paid more than those who stay put,” says Benjamin Frost, a senior client partner in Korn Ferry's Products business who looks at salary data worldwide.

Hiring managers should take note if they want to retain employees, Frost says. Some companies may be reluctant to promote people internally before they are seen as "ready," he said. He suggests that employers give existing employees the benefit of the doubt in new roles. After all, they are already familiar with company culture. "People don’t have this attitude when hiring," Frost said. "They will often hire people who they know are making a step up, without expecting them to prove they can do the job. This ignores the qualities of existing employees."

Employers also need to be on alert for wage disparities between "hoppers" and "stayers," says Mark Royal, a senior client partner for Korn Ferry who helps clients attract and retain talent. Pay gaps happen when newcomers earn signing bonuses or make more money than peers who've been with the company longer. Engagement research shows that when it comes to the motivational impacts of compensation, "internal equity trumps external equity," Royal said. "It's likely to be much more concerning, irritating or demotivating for an employee to know that there's someone else working in the same organization in a similar role, and with a very different deal."