Top Challenges Compensation Pros Will Face in 2023

Compensation management has changed quite a bit in recent years. The early pandemic saw pay cuts, deferred or canceled raise cycles, and a lot of uncertainty about when things would go back to normal. 

Once we adapted to our “next normal”, it became increasingly clear that remote compensation policies needed to be formalized in the new future of work. Fast forward to today, and compensation pros are facing a different set of challenges to overcome in 2023.

1. Rapid wage growth

Compensation budgets in the U.S. are expected to increase 4.6% in 2023, up from 4.2% in 2022, due to inflationary pressures and the talent shortage. This is quite a jump from the 3% increases most commonly seen in the pre-pandemic world of work.

But this may not be enough to retain workers. Inflation is up 6.5% over last year, leading to a cost-of-living crisis. Covering monthly expenses is workers’ top concern, as two-thirds say economic conditions are creating financial stress. Many workers are seeking out new opportunities to earn more — and it’s paying off. The average job switcher saw a 7.7% increase in pay over the last year.

Rapid wage growth can create challenges for hiring and retention if your salary ranges aren’t keeping up. Plan to update your ranges — and adjust employee compensation — once or twice in 2023 to uphold your compensation strategy and remain competitive.

2. Economic uncertainty

Executives worldwide say labor shortages and talent retention are among their biggest challenges, but slow growth and a recession are their top external worries for 2023. Most company leaders (51% of CEOs worldwide and 60% of CEOs in the US) don’t think the economy will improve until late 2023 or mid-2024. This may impact your compensation budget, particularly in industries most affected by hiring freezes and layoffs.

If you can’t get the salary increase budget you need to execute your compensation strategy, consider how you will allocate the budget you do have. This could include larger raises for your top performers, spot bonuses, or an equity-only cycle.

It’s also a good idea to use Total Rewards Statements to demonstrate the value of your benefits and any stock options your employees receive in addition to their salary. Many employers have been investing more in a competitive benefits package in recent years, and quantifying those benefits can help you retain talent.

3. Pay equity legislation

Pay equity legislation is changing quickly, including new pay transparency laws in California, New York, Rhode Island, and Washington. It can be challenging to stay on top of these changes — particularly if you have a distributed workforce.

For example, California employers must:

• Share salary range information with current and prospective employees
• Include salary information in job postings
• Maintain detailed pay records
• Never ask a candidate’s salary history or use salary history information to create employment offers
• Report on the number of employees by race, ethnicity, and sex in specified job categories and how they fall within pay bands, as well as the average pay for each demographic group 

Following pay equity best practices are a good first step, but they’ll only get you so far. Make sure someone on your team owns pay equity compliance in 2023 and beyond.

Want to learn more about pay equity legislation and best practices to ensure compliance? Download our free eBook, Pay Equity: The Ultimate Guide. 

4. Quiet hiring

In what’s been dubbed “quiet hiring,” employers are increasingly changing employee responsibilities to fill vacant roles or skill gaps rather than hiring externally. This can be a great move for employee development and retention, though it can (and most likely should) impact compensation.

Changing someone’s responsibilities can bump them into the next job level, but your compensation team may not be made aware of these changes. This can cause compliance trouble as many pay equity laws require equal pay for “substantially equal work.” 

Unfair pay practices can also impact:

• Recruitment. Candidates are 75% more likely to apply for a job if a company has a reputation for paying fairly. 
• Morale. Four in five workers feel more engaged and fulfilled by their work when they are paid fairly, and 81% say they are more productive and loyal to their employers.
• Retention. One in four workers who found out they were being paid less than a colleague of a different gender or race said they started looking for a new job. 

Make sure managers know that career growth is encouraged and that a compensation review should be conducted as employee responsibilities change. This can help your team stay on top of these important changes.

Final thoughts: Compensation challenges can become opportunities

Compensation pros have overcome many challenges in recent years and you will undoubtedly continue to adapt to new challenges as they arise. In doing so, you may find that these challenges can be opportunities to improve the way your organization operates. More frequent review cycles, better compensation communication, pay equity, and internal mobility are all net-positive for your team members and your support makes them possible.