BDO 2022 Salary Increase Budget Survey Report

Amid high demand for talent and rising inflation, how much should organizations budget for 2022 salary increases?

Inflation is at its highest level in three decades, and it has become increasingly difficult for organizations to attract and retain personnel. Employees are leaving the workforce or pursuing new opportunities for a variety of reasons, leading to a trend that has been dubbed the Great Resignation. The combination of high inflation and job switching is placing pressure on employers to raise wages. In Q3 and early Q4 of 2021, employers budgeted around 3% for 2022 merit/salary increases; in Q4 we started seeing reports of 3.9% merit increases. Given the escalating inflation, we anticipated that compensation budgets would continue to climb. New BDO survey data supports this prediction, revealing budgets to be even higher than anticipated.

BDO’s 2022 Salary Increase Budget Pulse Survey¹ polled 440 organizations of various sizes across multiple industries in January and February 2022. Survey results show average compensation budgets at 4.4% overall and 4.6% for for-profit organizations, with rates as high as 7% at the 90th percentile. The trend is further underscored for the nearly half of organizations that recently raised their salary increase budgets. Results show average compensation budgets for this group at 5.1% (70% above the 3% anticipated in Q3 2021) and 5.4% at for-profit organizations.
[1] For purposes of this survey, salary increase budget includes merit and cost of living adjustments.
 

Pay Planning Considerations

Inflation is at a high level, and it is unclear how long this situation will last. Even if inflation comes down, prices may not necessarily go back to pre-inflationary levels. As a result, there may be a real loss of purchasing power.

Inflation may not impact all people equally. It impacts those whose paycheck is primarily going to food, fuel and rent, compared to those who have limited fuel needs (for example, those working from home) and have fixed mortgages. The situation is further complicated by the fact that a 4% raise results in far fewer dollars for lower-income employees than for those with higher incomes. So the question is, how can an employer best support its employees through these challenging times?

While bigger raises provide one answer, it may require a more nuanced approach to meet the needs of a diverse workforce, nor can all employers afford bigger raises. It is important to think through how to care for your employees in the most effective way possible. Some ideas to consider include:
 

• Sliding-scale increases, with a slightly higher percentage allocated for non-exempt and non-management professionals
• Temporary coverage of some commuting costs for employees who have to come into the place of business (with a predetermined start and end date for this perk)
• An inflation-fighting bonus, which offers employees the flexibility to cover the costs that impact them the most — limit it to those who are likely hardest hit by inflation
• Budget a second round of increases in six months, with the amount to be determined based on economic conditions at the time

Any special efforts should be implemented based on strict, quantifiable, easily articulated criteria, and should be clearly communicated using positive messaging to ensure company-wide acceptance. Remind recipients of any tax consequences to help them understand how much they will receive and enable them to plan accordingly.

Larger salary increase budgets have a silver lining — they enable managers to differentiate salary increases based on performance in a more meaningful way. Be sure to take care of your best performers!