Economic Considerations for 2023 Pay

Amid considerable uncertainty, companies are facing a cacophony of messages when thinking about 2023 pay levels, from an anticipated recession to continued inflation to a mixed labor market. 

CEOs remain pessimistic about the economy despite a small uptick in confidence from 2022, according to a new Conference Board report. According to the study, most CEOs are preparing for “a brief and shallow U.S. recession with limited global spillover.” 

A new Willis Towers Watson piece lays out considerations for 2023 pay increases, highlighting:

• The potential for a recession: Although it seems obvious to take a more conservative approach to salary budgets when anticipating a recession, an organization’s own financial position and growth trajectory must be considered. If the organization is growing, cutting salary increases because of a recession that has yet to materialize carries talent risks. In the current competitive labor market, reducing pay increases more than your peers may result in reduced ability to attract talent long-term.
  
  
• Mixed labor market: We are experiencing an unusual job market in which some industries are facing significant layoffs while others are struggling to retain and acquire talent given significant overall job growth. WTW notes that even companies planning layoffs are providing 2023 increases, because they still need to retain the rest of the workforce. The same goes for companies that are only slowing hiring – the “dichotomy of current economic conditions” means companies might have to spend more on increases in some areas of the organization even while slowing hiring in other areas.
  
  
• Continued inflation: The questions of whether pay should track inflation has made headlines over the past year, with 2022 inflation levels closing out at 6.5% while WTW reported average merit budgets at 4.2%. In that same report, issued in November, WTW projected 2023 increases to be even higher at 4.6%. The flip side of the equation above is that increasing salaries too much results in layoffs, so companies are learning the risks of attempting to match salaries to inflation.

“Unlike prior years, many employees who quit in 2021 left to go to other industries,” WTW concludes. This means industry market comparisons may be of limited utility when determining whether pay levels are sufficiently competitive to retain talent long-term – a broader pay landscape may be required.