Don’t expect the same raise you got last year

Companies are cutting their budgets for merit raises next year, a sign of tightening that may surprise some employees who have received raises for the past two years.

Aon Plc, which compiles compensation data on over 5,500 employers in the United States, reported that merit raises will average about 3.7% across all industries next year, down from 3.9% this year, as companies rein in labor budgets and inflation eases from last year’s highs. A separate Mercer survey found a similar trend, with merit-based pay expected to rise 3.5% next year, down from 3.9% in 2023.

“People are not going to spend what they spent last year,” Tim Brown, an Aon partner, predicted. “Inflation has also decreased since last year.” As a result, wage pressure is increasing.”

The findings were echoed by workforce leaders. Allstate Insurance Co.’s chief human resources officer, Bob Toohey, predicted that compensation budgets in the United States “will be lower than last year — all company budgets will be lower than last year.”

Aon and Mercer’s projected pay increases are still well above pre-pandemic levels, when raises were capped at 3% per year. According to Mercer Senior Principal Lauren Mason, this is due to the labor market’s continued resilience and historically low unemployment. According to Labor Department data, initial jobless claims fell within striking distance of the lowest level in more than five decades in the week ending September 16. Inflation in the United States, which reached 9% last summer, is now less than half that level. According to Mason, additional reductions in compensation budgets are possible next year as businesses adapt to the changing economic landscape.

Workers in technology have been particularly hard hit, with Aon reporting that only 5% of firms in the industry are now aggressively hiring. This is a decrease from 22% last year. Tech firms typically outperform other industries in terms of projected salary increases, but due to layoffs and cost-cutting initiatives, they are expected to deliver merit raises of only 3.3% next year, according to Mercer, putting them below sectors such as energy and consumer goods.

According to a separate survey conducted by the technology job site Hired, tech salaries have reached a five-year low when adjusted for inflation. However, jobs requiring specialized skills, such as machine learning engineers and data scientists, remain in high demand.

Salary increases tied to promotions will also slow next year, according to Mercer, because companies plan to promote fewer people. To retain their best employees during the hiring boom of 2021 and 2022, many companies gave raises and promotions to white-collar workers even in the middle of the year. According to a survey conducted by workplace consultant Willis Towers Watson (WTW), seven out of ten companies spent more on pay adjustments than they had planned.

According to a separate WTW report, organizations are budgeting for overall salary increases of about 4% next year, down from the 4.4% increase they paid out this year. While pay raises are not as generous as they have been in recent years, companies are becoming more generous with perks and benefits such as flexible work schedules and paid parental leave, according to a recent survey conducted by staffing firm Robert Half Inc.