Inflation is coming down. Here’s what that means for annual pay raises

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Inflation and annual salary are not in one-to-one relationship. That became clear to many workers last year when the annual qualifying increase in their salaries and wages was nowhere near the four-decade high adjusted for inflation. Many workers pressed on, even though wages have risen more than has been normal for decades, and wondered why their salaries were not pegged to the Consumer Price Index, which rose more than 9% earlier this year. The workers had a point: Real wages don’t match the prices consumers pay for everything from groceries to gas and housing.

But most companies never set wages exactly in line with inflation, and never will. Once you pay people more, it’s hard to get back even if inflation starts to come back. Employers paid workers more last year, with average raises up nearly two percentage points, at 4.8%, more than the standard 3% merit raise often awarded in recent decades, according to data from compensation consultant Pearl Mayer earlier this year. .

Increasingly convinced that inflation has subsided and that higher prices for the U.S. economy have peaked, C-suites are at least beginning to ask the question: When will it be okay for a standard cost-of-living adjustment-linked salary? Get up to go down again? We’ve heard this from members of the CNBC CFO Council, but the answer to their question so far is that the labor market is still tight, and it won’t be until 2023 that employers return to a “normal” setting. raises

Downward pressure increases, but still tight labor market

Pearl Mayer’s latest data suggests that 2023 will not be a behind-the-three-percent year for companies across all sectors of the economy, although there is evidence of downward pressure on the absolute amount of wage growth.

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“There’s still a sense across industries that wage inflation is strong, there’s still strong demand for talent,” said Bill Reilly, managing director of Pearl Meyer.

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The Pearl Mayer survey was conducted in August and September before layoffs at tech giants including Meta, Amazon, Microsoft and HP began, and companies may still adjust their plans in the coming months based on economic conditions. Alphabet’s workers, including Google, are worried. But Reilly said that to date, the numbers are “solid at 4%” for executive and rank-and-file pay increases. Some companies in areas where demand is still high and labor supply is still tight, such as life sciences, are seeing annual salary increases of up to 5 percent, he said. Private companies, on average, expect to pay more than publicly traded ones, but the 4% figure represents the average increase in a Pearl Meyer survey of a representative sample of employers in the economy.

Peak salary?

The data indicates that the level of salary growth may be peaking at many companies. In 2022, the compensation firm found an increase of more than 4% for two-thirds of survey participants compared to this year’s average, or the 50th percentile. And for a quarter of organizations the salary increase was more than 6%. 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 as inflation topped 9% in June. A fifth of companies have made “off-cycle” pay adjustments this year.

This year, that may be less likely. However, when Pearl Mayer asked compensation decision makers in its survey to rank the challenges facing them in 2023, wage inflation and a tight labor market were still at the top of the list, along with concerns about a more challenging economic environment overall. “For many companies, it’s still really a seller’s market as it relates to employees and job opportunities and priorities,” Reilly said. “Down a bit, but still above historical norms,” ​​he said of the overall salary survey findings.

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

That applies to more than wages, and right now, work-from-home flexibility is one example.

Seventy-five percent of companies in the survey have some form of hybrid work and are not planning for next year, according to Pearl Meyer: Office perks and no money in the temptation to bring more workers back to the company’s locations.

The Fed, Inflation and the Slowing Economy

Actual wage growth levels can still change, like this year, when companies raise higher than initial forecasts. Next year may see the opposite, with a strong labor market and employee retention front and center as considerations, but macroeconomic challenges are mounting and companies are moving to reduce their salary budgets. Some industries will struggle more than others or be overly cautious because of the economic outlook and scale back their qualifying growth forecasts, Reilly said. But he added, “At a broad-based level they are likely to be as liberal as possible.”

A CNBC CFO Council member recently told us that the biggest risk to the Federal Reserve’s interest rate hike is that the labor market is a lagging indicator, which looks strong for the initial period of rate hikes, but then mounts quickly in the economy. The central bank to adjust its policy. Despite this C-suite fear, data indicates that even amid all the talk of recessions and layoffs, 99% of Pearl Mayer survey respondents said they plan for talent growth for 2023 for broad-based employee pools. “The point is that most do not indicate a wage freeze, and 4% was a solid number, and seems to align with other external data, and we are very confident in 4% as a market number,” Reilly said.

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How long will the high growth last? Could the standard 3% annual growth be a permanent thing of the past? The Fed’s policy changes are designed to bring inflation back to its 2% target and, on the way there, force higher unemployment as part of that fiscal tightening. But the Fed is facing some renewed pressure from the market to admit that the 2% target is outdated and unhelpful to the economy.

In an appearance on CNBC last Thursday, Barry Sternlich, head of Starwood Capital, which manages $125 billion for clients, called the 2% target into question as part of ongoing criticism of the central bank. “It will be very difficult to get to 2 [percent] And it’s not necessary,” he said.

Although inflation and salary increases are not in a one-to-one relationship, there is definitely a link.

Pearl Mayer research indicates that competency growth is a lagging indicator relative to inflation and costs. As inflation moderates over time, the Fed’s actions should translate into meritocratic tempering as it works its way through the economy, wherever it resides. “But I can’t tell you if it’s 2024 or 2025, another year or two above average,” Reilly said.

And as for returns at 3% or 3.5%, “it’s not next year,” one CNBC CFO council member said in a recent interview. And that was a CFO from the tech sector.

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