Understanding compensation is critical to staying competitive in today's volatile labor market. As we prepare for 2023, real wage growth is a concept that is particularly important.

Overall wages in the U.S. are projected to increase 4.1% during 2023, in line with 2022's actual average increase of 4.0%, according to WTW's global salary survey. Although 2022's average increase was the highest since 2008, inflation of around 7%-8% results in negative wage growth for many employee groups.

Real wages are calculated by dividing the current wage by one plus the current inflation rate. For an employee currently making $40,000, the individual's real income is reduced to $36,866 when the current inflation rate is considered.

Staying competitive requires both short- and long-term planning. Here are some salary considerations for the new year.

Salary Administration

Organizations frequently spend a lot of time—and money—setting starting salaries for new hires, developing salary ranges to accommodate new positions, and even developing and implementing formal salary structures. All of these are positive steps. However, they are often implemented and then abandoned. 

To remain competitive, ongoing salary administration is required. This includes:

1) Salary reviews. Salary reviews should be performed annually, and more frequently when recruiting or retention issues occur.

Hopefully, you've done some market pricing during the year to give you a baseline understanding of salaries in your competitive market. Combined with market pricing information, regular salary reviews will help to identify pockets of salary compression, which is when new hires make more than long-time employees doing the same work; the range of pay for employees performing the same work relative to performance and length of service; and other potential pay equity issues.

2) Salary range and salary structure reviews. These types of reviews are also critical pieces of successful salary administration. If you've developed salary ranges or more formal salary structures, you've most likely based them on market information. However, the market can change quickly. It is important to review and update those ranges and structures every other year.

3) Salary budgets. Many organizations don't prepare any type of salary budget. Companies that anticipate future salary expenditures often prepare an annual salary budget that includes:

• Performance-based and across-the-board salary increases.
• Salary increases to address inequities uncovered by reviews of paid salaries.
• Salary increases to address inequities uncovered by reviews of salary ranges or salary structures.
• Anticipated payouts under bonus and incentive plans.
  

Salary Increases

Once you've completed the basic salary administration activities described above, it's time to think about salary increases. There are dozens of types of salary increases. Some of the most common and those that affect the most employees are described below:

1) Pay for performance or merit. Common across many organizations, these increases are generally awarded for successfully achieving certain measurable criteria. These criteria may be established and communicated in a formal performance review or by less formal notes or discussions.

Most organizations using a pay-for-performance increase system will award increases based on some type of schedule, such as the end of the year, the end of the organization's fiscal year, or an employee's service anniversary. Awarding all increases at once has become a more commonly used approach because it allows the organization the opportunity to view all employees at the same time and award increases that align with salary increase budget parameters.

When salary increases are low, it can become challenging to award true pay for performance increases. For example, a top performer earning $60,000 might get a 5% increase, which would be $3,000. An average performer earning the same might get a 3% increase amounting to $1,800. But after taxes, there isn't much of a difference.

2) Across the board. These salary increases are generally given to all employees on a scheduled basis, often at the end of the calendar year or the organization's fiscal year. The amount is usually determined based on the organization's past performance, rather than determined through an advance salary planning or budgeting process.

These increases are usually awarded as a percentage of base salary and all employees generally receive the same percentage. However, giving all employees the same increased amount can perpetuate pay inequities that may exist in an organization.

3) Longevity or length of service. This type of salary increase is based solely on an employee's length of service with an organization. There is generally no performance component to these increases, which are often mandated by a contractual agreement. These types of increases are most common in government and education.

4) Cost of living adjustment (COLA). COLA salary increases are linked to a rise in the cost of goods and services. They are designed to help employees maintain, rather than increase, their purchasing power.

In the past, these increases have often been awarded to all employees. They are now used less frequently, because of vast differences in local and regional pay markets. For instance, pay in the San Jose, Sunnyville, Santa Clara area in California is approximately 71% higher than the national average, according to the Bureau of Labor Statistics. The increase in the number of remote workers in multiple locations also reduces the effectiveness of this type of salary increase.

Susan Palé is vice president for compensation at Affinity HR Group Inc. Affinity HR is the endorsed HR partner of Big “I" Hires, the Independent Insurance Agents of Virginia, Big I New York, Big I New Jersey and Big I Connecticut.

Time to start salary planning! Affinity HR Group can help you address your compensation challenges. Connect at 877-660-6400 or via email to get your organization on track with a customized strategy.