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In a labor market where there are more open jobs than people to fill them, U.S. companies are budgeting to provide employees with 4.1% average overall salary increases in 2023, according to WTW’s latest Salary Budget Planning Report.

The report found that nearly two in three (64%) U.S. employers have budgeted for higher employee pay raises than last year, while two-fifths (41%) have increased their budgets since original projections were made earlier this year.

Less than half of companies (45%) are sticking with the pay budgets they set at the start of the year. Some companies are also making more frequent salary increase adjustments. More than one-third (36%) have already increased or plan to increase how often they raise salaries. Among those respondents, the vast majority (92%) have or will adjust salaries twice per year.

Concerns over a tighter labor market seem to be the main driver for the higher budgets, with nearly three in four respondents (73%) citing this as their top factor. Additionally, 46% of respondents cited employee expectations for higher increases that are driven by inflation, and 28% adjusted their budgets in anticipation of stronger financial results.

“Compounding economic conditions and new ways of working are leading organizations to continually reassess their salary budgets to remain competitive,” said Hatti Johansson, research director, Rewards Data Intelligence, WTW. “With such a dynamic environment, it’s imperative for organizations not only to have a clear compensation strategy but also a keen understanding and appreciation of the factors that influence compensation growth. And, if an organization is planning to increase budgets, it’s best to be prepared as to how to award and communicate pay changes as quickly and effectively as possible.”

According to the survey, attraction and retention challenges continue to plague organizations, although fewer respondents expect those difficulties to be at the same level next year. More than nine in 10 respondents (94%) are experiencing difficulties attracting talent this year, but only 40% expect difficulty in 2023. Similarly, 89% of companies reported difficulty retaining workers this year, but that number is expected to drop to just under 60% next year.

In fact, many companies have taken or plan to take non-monetary actions to attract talent. For example, 69% of respondents have increased workplace flexibility, and 19% are planning or considering doing so in the next couple of years.

Six in 10 respondents (59%) have placed a broader emphasis on diversity, equity and inclusion (DEI), and 24% are planning or considering doing so in the next few years. Additionally, 49% of companies continue to enhance recruitment offers with sign-on bonuses and equity/long-term incentive awards, while over 21% are planning or considering doing so in the next few years.

Efforts to retain talent are also under way. Almost three-fifths (58%) of companies have broadened their emphasis on DEI to retain more talent, and over 26% are planning or considering doing so. In addition, half (50%) have increased the flexibility for remote work, and 25% are planning or considering doing so in the future. Almost 40% have changed their compensation programs (e.g., base salary and short- and long-term incentive plans), and another 35% are planning or considering. Over 36% have made changes to improve their employees’ experience, and 45% are planning or considering doing so.

“With a possible recession looming, continued high inflation and employers grappling with talent supply challenges, organizations need to get more creative to address attraction and retention challenges,” said Catherine Hartmann, global practice leader, Work, Rewards & Careers, WTW. “The workforce is composed of a diverse employee population, each with their own unique dynamics. Employers are challenged to meet their preferences and needs while delivering on a superior employee experience for all.”