Will Salary Deflation Happen in 2023?

Because we needed one more catchy name for this era of hiring, The Wall Street Journal recently published an article calling 2023 the year of “The Great Rebalancing.”

“After three whiplash-inducing years of, first, professional vulnerability and, then, perceived invincibility, many people are returning to more typical levels of career security and leverage,” the author writes. And it’s true that things are changing. Even my Apple News headline this week was entitled “The Strange Job Market” — the understatement of the year!

So, if you’re a Business owner or hiring manager, you’re probably wondering how this “rebalancing” translates to hiring, and for the purpose of this article — appropriate compensation for your team?

Here’s what we’re seeing, both in the data and from the “boots on the ground.” We’d love to hear more about what you’re seeing in your world.

Salary raises are staying strong — for the valued employee.

In November 2022, “Wages for workers who stayed at their jobs were up 5.5% . . . from a year earlier, according to Wall Street Journal and the Federal Reserve Bank of Atlanta.

This is the “highest increase in 25 years of record-keeping” and compares to historic norms of 2 to 3% (MarketWatch).

If you’ve kept up with the news at all, this probably comes as no surprise. But, you might ask, where is that money coming from? Here is where some of the data becomes tricky.

“To fund higher pay, organizations said they are limiting benefits and perks to those most valued by employees (21 percent of respondents), raising the prices of their products or services (17 percent), and resorting to company restructures and reduced staff headcounts (12 percent),” reports SHRM.

While 12% of companies may not sound like a lot, we imagine this contributes to the “buzz” out there around layoffs and helps explain some of the divergence in what we hear in the news.

Ultimately, to attract and retain employees in 2023, compensation will have to stay strong. In LinkedIn’s Global Talent Trends report in Oct. ‘22, “inflation and an uncertain economy have made compensation the No. 1 priority today globally.”

But perhaps more interestingly, employees have always thought they were underpaid, well before the pandemic (and 2022) happened.

“Way back when” in 2015, Payscale, a global compensation management solution, conducted a survey of 71,000 employees. The results were astounding—”Most People Have No Idea Whether They’re Paid Fairly” was the title in the ensuing Harvard Business Review article that covered the salary survey.

Why does this matter? “Pay is a crucial component of engagement because it’s not just a number; it’s an emotional measure reflecting how valued an employee feels by their employer. And it turns out, how people feel about their deal plays a huge role in how engaged they are in their work,” writes Dave Smith for HBR.

For all compensation discussions, I think this is an important starting point: compensation matters, and it’s often mis-understood.

“Holistically, a majority of workers (51 percent) paid at or above market believe they are paid below market.” (Payscale) A common complaint is that the average American’s purchasing power has gone down. And that’s true. The rate of inflation still outstrips the average wage increase. But — it is good to remember that there are times when purchasing power has outstripped inflation because the 3% raise still happened, even when inflation was decreasing.

So what do we do with this information? A few practical takeaways:

• Salary misperception is real and dangerous. Additionally, online calculators often convey inaccurate information and do more harm than good.

• Use good data. There are many excellent compensation companies out there. While we aren’t compensation experts, we do have access and subscriptions to compensation data that allows you to make informed decisions (we utilize the Economic Research Institute). We offer clients a complimentary compensation analysis at the start of every search project to make sure we’re headed in the right direction.

• The more transparent you can be about your pay ranges, the better. “Employees who felt that their organization was very opaque about their pay practices (1) were 183 percent more likely to look for another job than a five. That is almost three times more likely. Conversely, employees who felt their organization was very transparent (4 or 5) were 65 percent less likely to seek out new opportunities than employees who rated their organizations a one,” reports Payscale.

• But along with pay scale, do as much as you can to quantify what are the core skills needed to move to the next level within the company. Give the employee a goal to reach for.

• If you’re an employee and you feel like you’re being paid unfairly, approach the conversation with your manager with grace. You don’t know what budget constraints they are dealing with, and some elements may be beyond their control. Plus, as I always tell my kids, you win more flies with honey than with vinegar. ;)

According to Jennifer Floyd, CEO with HR Experts on Demand, “Compensation will continue to remain on the radar for quite a while. There are too few people in the labor market to make up for the Boomer gap. We are competing for talent as we knew we would 20 years ago, but Covid exacerbated the issue and added the complexity of remote working. Now, better-than-competitive compensation, flexibility in schedules and affordable benefits are the price of admission when it comes to attracting talent. Don’t be so stuck that innovative compensation options are cast aside because ‘we don’t do it that way here.’”

Without a question, 2023 will be an interesting year. We will probably see some moderation in the hiring market (which is good for all parties involved), but we expect that the talented, dedicated employees will continue to see strong compensation opportunities.