Gallagher Report Reveals Employers Expect to Spend Less on Compensation in 2023

Compensation trends now struggle to keep up with rapid market changes, rising minimum wage thresholds, and recruitment and retention objectives. In fact, Gallagher’s 2022 U.S. Career Wellbeing Report found that three in four (78%) employers surveyed raised their base salaries at nearly two times the rate of other total rewards. This strategy stretches pay scales to attract workers but also creates a wage compression.

“Many employers are now paying more for the employees they have and those they want in the midst of price inflation and an extremely competitive labor market,” said William F. Ziebell, CEO of Gallagher’s Benefits & HR Consulting Division. “While compensation is the key bargaining chip when attracting and retaining employees, market-driven increases may bring financial consequences for employers and their customers. Higher pay on its own isn’t likely to sufficiently and sustainably raise engagement levels or lower turnover rates.”

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Increases to total base pay amounts in FY 2022 exceed projections for FY 2023
Salary adjustments have largely taken their usual forms in FY 2022.

• The most popular salary increases include merit increases (76%) and market adjustments (68%)
• About one in three employers have budgeted for salary range (33%) or internal equity (32%) adjustments in FY 2022
• FY 2022 average total base pay increases were the lowest for executives (3.8%), slightly higher for management and other exempt employees (4.0%), and highest among those who are non-exempt (4.4%)
  • FY 2023 average total proposed increases range from 3.4% for executives to 3.6% for other employee groups

Nearly half of employers budget for promotional increases in FY 2022
Organizations also used promotions to reward employees.

• Promotional salary increase budgets grew 0.7 points from FY 2021 to average 3.8% for FY 2022
  • Projections for the next fiscal year are 3.7%

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Variable pay has edged up 1–4 points across all employee groups in FY 2022
Employers linked variable compensation to organizational success as a tool to prevent accruing the amount to base pay, while at the same time helping to avoid long-term costs.

• Incentives apply more often to executives (37%) and management (34%) then they do to employees in other exempt (29%) or non-exempt (26%) roles
• Average base pay used for variable compensation in FY 2022 is 25% for executives, up from 21.8% in FY 2021
• For management, the average base pay used to determine variable pay is 13.2%, up from 12.5% in FY 2021
  • Looking to FY 2023, initial plans for variable pay incentives either remain the same as last year (62%) or are not yet determined (21%)

Use of lump sum awards is similar to FY 2021

• Lump sum awards have replaced base pay increases for 37% of organizations
  • Most recipients are employees who have already reached their salary range maximum (31%)

Engagement surveys are growing
Employers can increase employee enthusiasm, satisfaction and job effort by clearly understanding and better managing engagement drivers.

• Nearly half (48%) of employers have used an employee survey within the previous two years, compared to 41% in 2019
• Another 21% expect to do so moving forward, which is a 3-point increase from 2021
• Large employers (67%) are twice as likely to conduct an engagement survey than small employers (33%)
• Measuring factors such as career mobility and fair compensation are integral to driving and sustaining engagement
  • Current drivers for employees include confidence in the organization, trust in senior leadership, connections with management and career development

“Compensation, benefits and flexible policies and practices work better together when they address engagement drivers and retention,” said Ziebell. “Evaluating the drivers of workforce engagement and retention, understanding how they differ and implementing a supporting strategy is a key component of success. The more they closely align, the more likely they are to support work-life balance. In addition it creates a more rewarding employee experience, which is a win-win for all.”

Gallagher’s 2022 U.S. Career Wellbeing Report is part of the Workplace Trends Report Series. It’s based on data compiled and analyzed from two annual U.S. employer surveys: The   2022 Benefits Strategy & Benchmarking Survey, collected from more than 4,000 employers in the U.S. across a wide variety of industries from December 2021 to March 2022. And our latest Salary Planning Survey, collected from approximately 1,170 participants between March and April 2022.

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