The recently released Compensation Trends Survey confirmed what we have known for over a year—organizations are struggling to attract viable human capital to fill the requirements of a demanding and difficult labor market. Resilience has been the overarching theme as organizations continue to take an aggressive approach towards attracting talent.
Companies are attempting to find the perfect formula for recruiting and retention and compensation is the key. The top three reasons given for establishing a strong compensation strategy are retaining current talent (98 percent), attracting/recruiting new talent (97 percent), and adjusting the compensation structure to market or beyond market (90 percent).
But creating a strategy is not enough. Eighty-two percent of organizations either agree or strongly agree that they regularly review market compensation and benefits offerings. Finding it difficult to keep up with the continuous changes over the past year, 25 percent altered the frequency of pay increases (other than new hires) to keep pace. Cumulatively, employers reported pay increases of 4.7 percent over the last 12 months. High performers and high potential employees received larger increases, averaging 6.4 percent in 2022.
Even with the pay increases, attracting and recruiting in this market has been difficult, regardless of the position. Over the past year, talent shortages contributed to the demand for higher wages as organizations struggled to fill open positions. Companies who were able to meet the salary demands made by new recruits found themselves faced with a new wage issue—pay compression. In an effort to attract talent, many companies unintentionally created a situation where experience, seniority, and skill does not differentiate pay between employees. To counter this negative impact, nearly half of employers adjusted pay for current employees as well as increased starting wages.
Sixty-nine percent of employers strongly agree/agree that pay compression between new hires and current staff has affected their compensation strategy. Employers shared that nonunion production and maintenance positions experienced pay compression most frequently, with 76 percent reporting that employees noticed the impact. Sixty-one percent of office, technical, and service groups reported they also noticed compression.
Over time, pay compression has a direct impact on employee morale. Base pay is not the only answer to bridging the gap in compensation and organizations have become creative in finding ways to bolster employees beyond pay. One of the most common solutions is variable or incentive pay. This approach can be awarded on either a companywide or individual basis and is most commonly granted in the form of incentive pay, spot bonuses, retention bonuses, and referral bonuses. Although these do not eliminate pay compression, it is a way to increase total compensation while base pay discrepancies are being evaluated. The most common types of variable pay offered over the past 12 months were shift differentials, commissions, individual incentives, spot or discretionary bonuses, profit/ gainsharing, and performance bonuses. Some organizations also began offering perks or additional benefits to employees, such as flexible work schedules, employee lunches, phone allowance, tuition assistance, and gift cards.
Pay transparency has emerged as another way to ensure employees are paid competitively. In recent years, legislation surrounding pay transparency has been passed in several states. Some organizations have adopted this approach, regardless of state requirements; however, the majority of organizations responding to the survey do not have a pay transparency policy in place. Fifty-nine percent have considered adding higher level of transparency to address the challenges associated with retention and attraction of talent. Total compensation statements allow employees to see the full value of their pay and benefits and not just focus on base pay. Thirty-four percent of organizations provide total compensation statements to employees, while another 19 percent are considering them as a resource.
Most employers indicate the most desired approach to improving pay transparency is with regular conversations about pay between managers and employees. Currently, 31 percent of organizations train their managers on how to communicate about pay. Companies who support such practices also provide a catalyst for managers to have pay conversations with employees, provide an explanation of how pay decisions are made, and help explain the total reward package in more detail. This helps reduce confusion, mistrust, and dissatisfaction with the compensation structure and makes employees feel like they are involved in decisions tied to compensation.
Despite efforts to be more transparent with pay practices, inflation has created new concerns. Employers report that over half of office, technical and service, and production and maintenance employees feel that compensation is not keeping up with inflation. To combat this, 80 percent of organizations have increased starting rates, 73 percent have increased standard wages, and 52 percent have updated wage structures or pay ranges. Some employers have chosen to look beyond pay adjustments and have implemented other strategies, such as employee referral incentives (50 percent), offering work from home to reduce commuter expenses (32 percent), and hiring incentives (29 percent).
In 2021, nine percent of organizations participating in the Compensation Trends Survey believed the U.S. economic outlook would decline. This year, 40 percent feel it will decline and 38 percent feel it will remain the same. Employers and employees are tiring of inflation, supply chain issues, skill shortages, and other challenges, and share concern that the current environment may continue through 2023. Despite concerns, 65 percent of organizations are projecting that their sales/ revenue will significantly or slightly increase in 2023 compared to 2022 and are budgeting an average four percent pay increase over the next 12 months. Office, technical and services, production, and maintenance (nonunion) groups are budgeted for a slightly higher increase of 4.1 percent. High-potential employees are expected to see slightly higher increases of 5.9 percent in 2023.
When multiple factors influence total compensation, employers may benefit from reminding employees that compensation encompasses more than just base pay. Providing a holistic approach to compensation can help employees recognize the full value of base pay, bonuses, incentives, benefits, and/or perks, rather than allowing them to focus on smaller pieces that may not be competitive when singled out. Providing resources to help employees recognize the total investment the organization has made in them, in addition to providing a total picture of their value to the organization, can be invaluable to retaining employees.
The executive summary of the 2022 Compensation Trends Survey provides a broader view of what employers are saying about the past year and what they anticipate for the coming year.