American workers can expect bigger raises next year, despite a looming recession

It’s the time when companies start to get realistic about what’s ahead for the coming year, particularly during the first quarter. And while that’s already playing out for some companies in the form of layoffs and hiring freezes, there is some good news for some employees heading into 2023. 

Next year’s raises should be even higher than 2022 payouts, according to WTW’s annual salary budget planning report, based on survey responses from 1,550 U.S. organizations fielded in October. Despite the threat of an impending economic downturn, companies estimate they’ll be increasing their average workers’ salary 4.6% next year, up from the 4.2% the average worker received in 2022. 

“As inflation continues to rise and the threat of an economic downturn looms, companies are using a range of measures to support their staff during this time,” Hatti Johansson, research director of reward data intelligence at WTW, said in a statement. 

Boosting salary budgets is proving especially critical as companies continue to struggle to attract and retain employees. Three-quarters of organizations admitted to hiring and staffing issues—a number that’s nearly tripled since 2020. The continued tight labor market is the primary reason about 68% of companies opted to increase salary budgets. 

But that pressure to pay well is a balancing act. About seven in 10 companies said they spent more than they’d planned to on salary increases and compensation adjustments over the last year. In order to fund pay increases, one in five are planning to raise prices on their products while 12% expect they will need to restructure and reduce staff headcounts. 

And yet, despite the historic pay increases that organizations have doled out in recent years, compensation has not kept pace with inflation. National wage growth during the third quarter of 2022 increased 4.7% year over year, according to the PayScale Index. Yet, as of the end of September, real wages—which factor in the effect of inflation—are actually down 3% year over year. 

For organizations struggling to make the math work if workers keep playing musical chairs with jobs and employers, WTW’s Lesli Jennings recommends focusing on the overall employee experience, not just providing pay increases. Two-thirds of companies surveyed have already provided workers with more flexibility and 61% have sharpened their focus on diversity, equity, and inclusion policies and programs. 

“By focusing on health and wellness benefits, workplace flexibility, careers and DEI, organizations can position themselves as the employer of choice for their current and prospective employees,” Jennings says.