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What to Consider When Developing Your 2023 Compensation Strategy

November 4, 2022 5 Min Read Alerts, Article, Retained Executive Search
Adam Berman Director-in-Charge, Retained Executive Search

When business owners, CFOs, and Human Resources executives reach out with compensation questions, I immediately return the question with, “What are you trying to accomplish?” It’s a simple question, but one that is all too often difficult to answer. If you can’t answer the question in easy to understand terms, take a step back so that you can define what you are trying to accomplish and use this as the starting point when developing your compensation strategy.

Here are few tips to consider as you begin developing your strategy:

Keep it simple. Make sure your compensation strategy is clearly defined, easy to understand, and executable. While there are lots of potential approaches to your strategy, it must be focused on the attraction, retention, productivity, and/or the development of your people. It should reinforce that they have the appropriate knowledge, skills, competencies, and mindset to succeed in your organization.

Your compensation strategy should also reinforce the culture and behavior needed for your company to be successful. If it is too complicated, it will not have its intended impact. I worked for several years with a CFO who helped to achieve that simplicity goal. We were able to explain our compensation plans to a recruit (at any level) in a sentence or two and our employees could almost always calculate their own incentives with a good degree of accuracy. The simplicity of a plan focused on areas that aligned with corporate strategy and culture helped to increase retention and engagement, and allowed us to recruit extraordinary talent.

Be smart and realistic. Compensation that is not directly tied to corporate strategy is doomed to fail. Compensation strategy that isn’t realistic in our current talent ecosystem will never achieve your desired strategic outcomes. This is not the talent landscape of 2008-2010! Compensation changes that are not appropriately budgeted for or distributed according to plan will also likely fail to have their intended impact.

Understand the market. Our current talent environment is unique. According to data from consulting firm WTW, 96 percent of companies globally have increased salaries. The average salary increase hit 4.9 percent thus far in 2022 (compared to 4.0 percent in 2021) and interestingly, this number is higher than budgeted increases.Another study confirms this disparity. In August, WorldatWork’s 2021-2022 Salary Budget Survey reported planned salary budget increases of 3.3 percent, with the actual number coming in at 5.0 percent. Still, that’s about one percentage point shy of increases (a 6.0 percent median) survey respondents said are necessary to maintain and attract talent.

While the economy is showing some troubling signs, many experts believe that salary increases will either hold steady or continue to climb for the remainder of 2022. Inflation, employee concerns, and apprehensions about a tight labor market are frequently cited by CEOs, CFOs, and people executives as the primary drivers of salary increases.

While most companies are facing attraction and retention challenges that they have never faced before, there may be some be good news on the horizon. Another recent WTW study points to a more promising future, with 40 percent of companies surveyed expecting difficulty in attracting talent in 2023, a significant drop from this year’s initial outlook. Similarly, while 89 percent of companies report difficulty retaining workers this year, that number is expected to drop to just under 60 percent in 2023.

Take a Total Rewards approach. We should be defining compensation with a new lens – a Total Rewards approach. To attract and retain great talent, we see successful companies using non-monetary approaches in addition to traditional cash, bonuses, incentives, COLAs, etc. Considering the recent fears about an economic downturn, high inflation, and the continued talent shortfalls, companies need to get more creative as they look to address compensation and ongoing talent shortages.

Almost 70 percent of companies surveyed have increased workplace flexibility, and another 19 percent are planning or considering doing so in the next two years. To expand the traditional candidate base, more companies are placing an increased emphasis on diversity, equity, and inclusion (DEI). Companies with strong internal skill development and career pathing opportunities tend to fare better than those that just focus on cash.

While the focus on bringing in new people is important, it necessary to look at internal equity simultaneously. Internal inequities in Total Rewards that can result from bringing in new hires at elevated pay rates may leave some current workers feeling undervalued and underappreciated.

With an increased focus on a Total Rewards approach and many companies exceeding their 2022 salary increase budgets, how is it moving the dial with employees? According to Robert Half, 55 percent still feel underpaid! A troubling finding in this study is that 54 percent of employees believe they hold the cards when it comes to compensation and rewards negotiations. It’s easy to understand why; as long as job openings outnumber candidates and inflation continues, employees will indeed hold the cards in many cases.

As you design your 2023 compensation strategy, it’s important to keep the above factors in mind. Taking the time to clearly define and understand what you are trying to accomplish will help make your strategy more effective. Contact Adam Berman, Director-in-Charge, Human Capital Resources, for a conversation about how you can best develop your 2023 compensation strategy.

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Adam Berman

Adam Berman

Director-in-Charge, Retained Executive Search

Retained Executive Search Specialist

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