Inflation is down. Here’s what that means for your annual pay rise

Inflation and annual salary are not in a one-to-one relationship. That became clear to many workers last year when their annual merit increases to wages and salaries were nowhere near four-decade highs for inflation. Many employees grumbled, even though the salary was increased by more than had been normal for decades, and wondered why their salary was not indexed to the consumer price index which had reached more than 9% earlier this year. The workers were right: real wages did not keep up with the prices consumers paid for everything from groceries to gas and housing.

But most companies have never set and will never set wages in line with inflation. Once you pay people more, it’s hard to get that money back, even when inflation starts to come down. Employers paid workers significantly more last year, with the average increase almost two percentage points higher, at 4.8%, than the standard 3% merit increase most often given in recent years. decades, according to data from compensation consultant Pearl Meyer earlier this year. .

As inflation has fallen and there has been more conviction that the peak of rising prices is near for the US economy, the C-suites have begun to at least ask themselves the question: when will- acceptable for the standard salary linked to the adjustment of the cost of living? relaunch to come down? We’ve heard this from members of the CNBC CFO Council, but their answer to the question so far has been that the labor market is still too tight, and it won’t be 2023 that bosses will return to the ” normal” in the frame raises.

Downward pressure on increases, but labor market still tight

Pearl Meyer’s latest data on companies across all sectors of the economy also indicates that 2023 will not be the year of the return to 3%, although there is evidence of downward pressure on the amount. absolute wage increase.

“There’s always this feeling across all industries that wage inflation is high, there’s always a strong demand for talent,” said Bill Reilly, chief executive of Pearl Meyer.

The Pearl Meyer survey was conducted in August and September before layoffs began to mount at the biggest tech companies, including Meta, Amazon, Microsoft and HP, and companies may still adjust their plans in the months ahead. ahead depending on economic conditions, which has workers worried, including at Alphabet’s Google. But Reilly said the numbers so far are “solidly at 4%” for executive and base pay increases. Some companies in sectors where demand is still high and labor supply still tight, life sciences for example, are considering annual wage increases of up to 5%, he said. Private companies, on average, expect to pay more than publicly traded ones, but the 4% figure represents the median increase in the Pearl Meyer survey of a representative sample of employers across the economy.

Maximum salary?

The data indicates that the spike could be related to the level of wage increases at many companies. In 2022, the compensation company found that total increases were more than 4% for two-thirds of survey participants, compared to this year’s median, or 50th percentile, at 4%. And the salary increase was more than 6% for a quarter of the organizations. This year, that 75th percentile is at 5%. In 2022, not only was the median closer to 5%, but many companies made mid-year adjustments to pay, with inflation reaching over 9% in June. A fifth of companies have made “off-cycle” wage adjustments this year.

This year, that might be less likely. However, when Pearl Meyer asked compensation decision-makers in its survey to rank the challenges they face in 2023, wage inflation and a tight labor market still topped the list, alongside concerns about a more difficult economic climate overall. “For many companies, it’s still a seller’s market when it comes to employees, job opportunities and preferences,” Reilly said. “Slightly down, but still above the historical norm,” he said of the findings of the global salary survey.

“Many companies are still actively recruiting and know that the mindset of employees has changed, especially for young people,” Reilly said.

This applies to more than wages, and right now flexible working from home is an example.

According to Pearl Meyer, 75% of companies surveyed have some form of hybrid work and one expense that is not planned for next year: any money on office perks and incentives to bring more workers back to work sites. ‘company.

The Fed, Inflation, and a Slowing Economy

Actual levels of wage increases can still change, just like this year, when increases end up being higher than companies initially expected. Next year could be the reverse of that, starting with a strong labor market and employee retention in focus, but macroeconomic challenges are mounting and leading companies to cut payroll budgets. Some industries will struggle more than others or be overly cautious due to the economic outlook and reverse their forecasts for merit increases, Reilly said. But he added that “more people are likely to be as generous as possible on a general level”.

A member of the CNBC CFO Council recently told us that the big risk with Federal Reserve interest rate increases is that the labor market is a lagging indicator, looking solid for much of the initial period of higher interest rates. rate, but then the layoffs increase too quickly in the economy. the central bank to adjust its policy. Despite this fear of the C-suite, the data indicates that even amidst all the talk of the recession and layoffs, 99% of Pearl Meyer survey respondents said they expect merit raises for 2023 for broad-based employee pools. “The thing is, most weren’t reporting a pay freeze, and 4% was a solid number, and seems to line up with other external data, and we’re pretty confident on that 4% as a market number,” Reilly said.

How long will the higher increases last? Could the standard 3% annual raise be a permanent thing of the past? The Fed’s policy shift is designed to bring inflation back to its 2% target and, in doing so, force higher unemployment as part of this economic tightening. But the Fed is also facing new market pressure to accept that the 2% target is overshot and unnecessary for the economy.

During an appearance on CNBC last Thursday, Barry Sternlicht, the head of Starwood Capital, which manages $125 billion for its clients, questioned the 2% target as part of his criticism of the central bank. “It will be very difficult to make it go to 2 [percent] and it’s not necessary,” he said.

Even though inflation and wage increases are not in a direct relationship, there is certainly a connection.

Pearl Meyer’s research indicates that merit increases are a lagging indicator of inflation and costs. As inflation moderates over time, as Fed actions work their way through the economy, wherever it settles, this should translate into moderating increases of merit. “But I couldn’t tell you if it’s 2024 or 2025, a year or two above average,” Reilly said.

And as for going back to 3% or 3.5%, “It’s not next year,” a CNBC CFO Council member said in a recent interview. And he was a CFO in the technology sector.