Inflation is declining. Here’s what that means for your annual salary increase

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Inflation and annual wages are not in a one-to-one relationship. This became apparent to many workers last year when annual merit increases in salaries and wages were nowhere near the highest levels of inflation in four decades. Many employees stuck, even as wages increased by more than has been the norm for decades, and wondered why their pay was not tied to the consumer price index, which hit more than 9% earlier this year. The workers were right: real wages did not keep pace with the prices consumers paid for everything from groceries to gas and housing.

But most companies have never, and never will, set salaries to exactly match inflation. Once you pay people more, it’s hard to get that back even when inflation starts to subside. Employers paid workers much more in the past year, with the average merit increase about 2 percentage points higher, at 4.8%, than the standard 3% merit increase most often awarded in recent decades, according to data from compensation consultant Pearl Meyer. earlier this year.

As inflation subsided and there was more of a conviction that higher prices peaked in the US economy, the C-wards at least began to ask the question: When is it ok for wages linked to the standard cost of living adjustment to come back down again? We’ve heard it from the CNBC CFO’s, but their answer to the question so far has been that the job market is still very tight, and it won’t be in 2023 that chiefs return to a “normal” hike.

Downward pressure on increases, but the labor market is still tight

The latest data from Pearl Meyer looking at companies across the economy also suggests that 2023 will not be a three percent year, although there is evidence of downward pressure in the absolute amount of the wage increase.

“There continues to be a sense across industries that wage inflation is strong, and there is still strong demand for talent,” said Bill Riley, managing director at Pearl Meyer.

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Pearl Meyer’s survey was conducted in August and September before layoffs began to mount at the tech sector’s largest companies, including metaAnd the AmazonAnd the Microsoft And the HPand companies can still adjust their plans in the coming months based on economic conditions, which are of concern to workers, including in google alphabet. But Riley said that so far, the numbers are “steady at 4%” for both CEO and salary increases. He said some companies in sectors where demand remains high and labor supply remains scarce, life sciences as an example, are looking at annual wage increases of up to 5%. Private companies can, on average, expect to pay more than publicly traded companies, but the 4% figure represents the average increase across the world. Pearl Meyer Survey For a representative sample of employers across the economy.

rush push?

The data suggests that the peak could be in the level of wage increases in many companies. In 2022, the compensation firm found, total increases were more than 4% for two-thirds of respondents compared to this year’s average, or the 50th percentile, of 4%. The increase in wages was more than 6% for a quarter of enterprises. This year, that percentage is 75,5%. In 2022, not only was the average closer to 5%, but many companies made mid-year adjustments in terms of payment as inflation soared to more than 9% in June. A fifth of companies have made “out of cycle” salary adjustments this year.

This year, that may be less likely. However, when Pearl Meyer asked compensation decision makers in her survey to rank the challenges they face in 2023, wage inflation and a tight labor market were still high on the list alongside concerns about a more challenging economic climate in general. “For many companies, it’s still really the seller’s market as it relates to employees, job opportunities, and preferences,” Riley said. “Slightly lower, but still above the historical norm,” he said of the overall salary survey results.

“Many companies are still actively recruiting and know that the mentality of employees has changed, especially for younger people,” Riley said.

This applies to more than just wages, and right now, the flexibility to work from home is one example.

And according to Pearl Meyer, 75 percent of the companies in the survey had some form of hybrid work and one expense that wasn’t planned for the coming year: no money on office perks and inducements to bring more workers back to company sites.

The Fed, Inflation, and the Slowing Economy

Actual pay increase levels may change, just like this year, when the increases are higher than companies initially projected. Next year could be the opposite, starting with a strong job market and employee retention front and center as a consideration, but growing macroeconomic challenges are leading companies to cut their payroll budgets. Riley said some industries will struggle more than others or be too cautious about the economic outlook and hold back on their expectations of a meritocratic increase. But, he added, “More is likely to be as generous as they can be on a broad level.”

A CFO board member told us on CNBC recently that the big risks with the Fed’s rate hike is that the labor market is a lagging indicator, looking strong for most of the initial period of the rate hike, but then layoffs across the economy escalated quickly. big. the central bank to adjust its policy. Despite this fear of C Suite, the data shows that even amid all the talk of recessions and layoffs, 99% of respondents to a Pearl Meyer survey said they plan to increase eligibility for 2023 for large-scale employee groups. “The point is, most of them didn’t mention a salary freeze, and 4% was a flat number, and it seems consistent with other external data, and we’re pretty confident that 4% is the market number,” Riley said.

How long will the higher increases last? Could a record annual 3% increase become a permanent thing of the past? The Fed’s policy shift is designed to bring inflation back to its target of 2% and, on the way to that, force higher unemployment rates as part of that economic tightening. But the Fed is also facing some new pressure from the market to accept that the 2% target is outdated and not good for the economy.

In an appearance on CNBC last Thursday, Barry Sternlicht, president of Starwood Capital, which manages $125 billion for clients, said, called to ask 2% target as part of his ongoing criticism of the central bank. It will be very difficult to get to number 2 [percent] It is not necessary.”

Although inflation and wage increases are not in a one-to-one relationship, there is certainly a correlation.

Pearl Meyer’s research indicates that meritocracy is a lagging indicator relative to inflation and costs. As inflation moderates over time, as Fed actions work their way through the economy, and where they level off, that should translate into tempering in meritocracy. “But I can’t tell you if it’s 2024 or 2025, another year or two above average,” Reilly said.

As for a return to 3% or 3.5%, a CFO board member told CNBC “It’s not next year.” That was the CFO from the technology sector.

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