HR Headaches: Budget for Higher Salary Increases for 2023

For small to medium-sized businesses, payroll often represents their single largest budget line. Wages, bonuses, taxes, benefits, and perks are generally 20 to 30% of a small business’ gross revenue. In service-heavy industries, that cost can rise to 50%.

Each year, annual salary raises increase the amount we offer staff members. Hopefully, those align with increasing revenue.

Current economic conditions are shifting the way many business leaders are planning annual increases for 2023. A shortage of skilled (or trainable) talent, inflation, and other factors are putting pressure on businesses to raise wages more significantly for the coming year. In order to attract and retain talent, paying more might simply be the cost of doing business in 2023.

How much will salary increases cost in 2023?

A new survey from Salary.com verifies business is planning on spending more just to stay the course. Their survey polled over 1,000 HR professionals across a wide range of industries in the US and Canada. Survey findings show that almost half of the participating companies admit the 3% raise of the past is gone. Most companies are anticipating a minimum of 4% increases. Some are even planning on 5 to 7% wage adjustments for the coming year.

In order to attract and retain talent, the need for a slightly higher cost of living allowance may be needed.

The data shows wage increases are anticipated across the range of workers. Staff will likely see the same 4% boost to their wages for the coming year. Regardless of whether people are in positions as:

• Executives
• Managers
• Exempt
• Non-exempt employees

Smaller businesses (with fewer than 500 full-time staff) are more likely to offer Cost of Living Allowance (COLA) raises to workers than their larger counterparts. SMBs plan on a 2.5 to 2.7% COLA increase: large companies 2%.

The effects of inflation may be more deeply felt by workers in smaller organizations. In order to attract and retain talent, the need for a slightly higher cost of living allowance may be needed.

Can you afford to pay more?

Wages have started to rise steadily as business leaders continue to compete for available talent. Minimum wages have also been increasing in states around the country, adding to economic pressure. In many areas, $15 per hour plus is the least a company will need to spend to hire entry-level talent. Even when their location’s minimum required wage is considerably lower. For some, talent is unavailable at any price.

For most businesses, margins are tight. Supply chain issues are making it challenging to keep pace with demand, and inflation is pushing the price of every material and supply higher. Passing costs along to customers has its risks. For many, the price may be too high; for others frequency of purchases may be affected. The additional cost of wages may tip the already precarious balance many small businesses are currently experiencing.

On average, small business profit margins run about 7 to 10%, depending on the industry. For service-oriented organizations with less overhead, that range can be higher. The margins may be significantly lower for some, like food service operations. Many companies weathered the pandemic doing more with less, including reduced revenue. Recovery may be slow and steady, but additional financial pressures could be challenging.

Can you afford not to pay more?

The tradeoff between retaining staff members with a slightly larger than planned increase may be worth the investment. At $15 per hour, 4% means the wage goes to $15.60: if you had planned a 3% increase, the adjusted wage would be $15.45.

If the employee is full-time, at 40 hours per week, the annual cost at 4% increases from $31.200 to $32.448: at 3%, it rises to $32,136. The extra $312 across the entire year could mean retaining that staff member and avoiding the cost of recruiting, hiring, and training their replacement.

Other costs

Remember that bumping an employee’s salary, no matter how large or small, isn’t the only cost involved. As their wages increase, so do the business’ contributions for FICA and other payroll taxes.

Time off with pay will cost more, as well as the expense of matching contributions to retirement accounts. If bonuses are tied to wages — either as percentages or otherwise — you’ll also want to factor in those costs.

While it may seem like a small investment to raise salaries for one or two employees, the more people on staff, the higher the cost will be. According to the Small Business Administration, almost 30 million SMBs in the US employ nearly half the American workforce. In recent years, small businesses, mainly companies with less than 50 employees, added more jobs than their larger counterparts.

While the expense of salary increases will rise, it may still offset the cost of attrition — particularly in a competitive market. Retaining your high performers saves money in the short term and increases profit in the future.

Messaging matters

Employee engagement is key to any successful business. When staff members feel valued and are rewarded fairly, they take ownership of their work and company. Of the many ways employers look to increase engagement, wages are a first step. Still, they’re only part of their overall strategy.

Employee well-being is another way to connect with staff members. Financial wellness programming has been trending as a top benefit employees want from businesses. These offerings help workers with the most basic to the most complex financial planning. Whether it’s working to pay down student loan debt or retirement readiness, financial wellness plans help workers directly and, as a byproduct, their employer.

Business leaders in every size organization are aware of the financial pressures employees are under. Rising inflation is making it difficult for staffers to stay afloat. Many employers have chosen to raise wages to help. Others are working with staff members to offset the high cost of gas with gift cards and cash payments.

Business leaders in every size organization are aware of the financial pressures employees are under. Rising inflation is making it difficult for staffers to stay afloat.

While the actual difference in the hourly increase may not seem substantial, there may be a psychological effect. For workers typically accustomed to a 3% increase, letting them know that for 2023 4% is forthcoming may be a welcome message.

Whatever the market dictates

Another consideration when planning for 2023 increases will be what the market will bear. As you compare current and planned compensation rates for employees, look at the competition in your area. Are you paying a fair rate for the work being performed?

You may be able to compare exact work titles and responsibilities to local businesses. To assess your place in the market, look at:

• What they’re paying
• The benefits they’re offering
• How successful they are at recruitment

Hint: the more a company’s ads run, the more difficult time they’re having finding help.

For some positions, there aren’t direct comparisons. Look for comparable skill levels rather than titles when assessing your compensation plan. If the role is entry-level with relatively low responsibility, look for something similar. The higher up the skill set, the more you’ll want to look for equivalencies.

If training is necessary, what will the ultimate skill level become? Look to local businesses to compare what they’re paying for trainees in similar industries to make your assessment.

Capturing the eye of valuable talent

Keeping pace with continuously changing economic conditions is typically the wheelhouse of small businesses. Their small size allows them to transition quickly and with agility in response to whatever comes their way.

As financial forecasts show no sign of an uptick, it will be up to business leaders to determine where they’re investing wisely. In most cases, satisfied, engaged employees are one of the best investments an organization can make.