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The standard 3% annual pay raise will no longer cut it, largely due to inflationary pressures on everything from gas to household goods and higher employee wage expectations.
According to Payscale's Salary Budget Survey, employers are budgeting for an average 3.8% salary increase in 2024. Last year, employers expected the same increase for 2023, though actual pay increases were 4%. However, Payscale anticipates actual raises for next year will stay at 3.8% as inflation cools and the labor market loosens. In fact, 22% of surveyed employers plan to lower their salary budget increase next year, up from 9% last year.
Yet employees still feel the lingering effects of inflation as necessities like housing and groceries remain costly. Employers will likely have to meet workers' wage expectations to stay competitive in the job market.
“In the U.S., we’re on a downward trend in inflation. There's not a direct relationship between inflation and cost of labor, but it does have an impact, particularly on employee expectations, because of the cost of living and the erosion of real wage growth they've experienced,” says Ruth Thomas, a pay equity strategist at Payscale.
Thomas speculates that emerging laws and regulations around pay transparency could pressure employers to budget for higher increases. The number of employers pushing for higher salary budgets because of changes in compensation philosophy increased to 34% this year from 26% last year.
“We know organizations have been reviewing their pay ranges. We know they've been dealing with internal pay compression issues because they have to post pay ranges externally, which other employees can see,” she says.
But making decisions on raises is not as simple as following the national average increase percentage, Thomas cautions. Expected raises vary on factors like geography and industry. For example, exempt (non-management) employees in the U.S. health care and social assistance industry are expected to see a 3.5% salary increase in 2024. Meanwhile, non-management employees in the U.S. tech sector may see a 4.1% pay raise next year.
“For a long time, we all centered around this notion of a 3% increase,” says Thomas. But with the pandemic’s impact on the economy and financial constraints, employers will have to scrutinize how their pay raises fit into their business priorities and recruitment and retention strategy.
“It's really thinking about your talent supply that will help to drive success in your business priorities rather than slavishly following a magic number,” she adds.
Paige McGlauflin
paige.mcglauflin@fortune.com
@paidion
