A look back at compensation trends in 2022 and predictions for 2023

2022 has come to an end and it is an understatement to say it’s been a busy year for HR and compensation practitioners. For many, it has felt like we’ve kept our heads on a swivel supporting our businesses with labor market challenges, a cost-of-living crisis, and increasing demands for pay transparency as well as responding to on-going business transformation and a possible economic downturn. For many compensation practitioners, Q1 is a busy time where you are deep into end-of-year compensation review planning for execution of pay increases in the new year.

But here are a few thoughts around what might need to be on your agenda for 2023:

Employers will confirm their pay strategies for remote and hybrid work

COVID-19 redefined the modalities of work, and one key factor impacted is where work is done. Nearly two years on from the start of the great “work from home” experiment, what is clear is that things will not go back to how they were before. Companies that embrace remote work will benefit from an increased diversity of talent pools as well as the reduction of administrative costs.

Our 2022 Compensation Best Practice Report indicated that at the start of the year,43 percent of employers were aiming to adopt a hybrid office where most employees are still local but can work from home a few days a week, 32 percent were planning for a traditional office-centric work environment, 18 percent were opting for a remote-first work environment with office space for those who need it and only 4 percent were moving toward a fully remote organization with no permanent office locations. It will be interesting to see in our 2023 Compensation Best Practices Report what progress has been made.

What we do know is that workplace flexibility is fast becoming an integral part of your employee value proposition. Employees can now make a deliberate choice based on their own work environment preferences. We are even seeing workers shift sectors so they can take advantage of the benefits of remote work.

As we close out the year, we know more employers are confirming their approach to pay policies for these different working arrangements, but they still lack a consistent approach. In the United States, many organizations are opting for a national average approach, unless they have employees based in a very high cost of labor markets. If you are looking for data to support your own policy development, understand that this approach will take a while to settle down and for data trends to stabilize as we deal with the practicalities of levelling pay for existing, relocated, and newly hired remote or hybrid workers.

Will pay transparency become standard practice?

Inc Magazine declared 2022 the year of pay transparency. Indeed, when looking at data from the Bureau of Labor Statistics, we find that 1 in 4 workers (technically 1 in 3.6) will be covered by some form of pay transparency legislation in 2023 — and that only accounts for workers residing in states, cities, and countries that have passed pay transparency laws so far. Specifically, the aggregated labor force for locations with pay transparency laws is 45.8 million. The total US labor force is 164.7 million as of October 2022. This doesn’t include remote workers, which is a growing segment of the workforce as noted above.

In the context of the 2023 talent market, embracing pay transparency is key to any employee engagement strategy as transparent employers tend to experience higher employee retention and more investor interest.  We’ve had an ongoing active discussion on this topic throughout the year here at Payscale. Through our very popular pay transparency legislation webinar series, we learned that the key challenge is getting buy-in for pay transparency and implementing the foundational work needed to level and benchmark your jobs, create pay ranges that work for you, and then develop and execute your communication strategy.

In our End of Year webinar, I was asked whether pay transparency would become a standard practice. My response is that it probably will not, but it will become best practice. Leading companies will distinguish themselves by articulating how they value employees and build trust in how compensation is determined.

Pay gaps will not instantly improve

The discussion around pay transparency also relates to organizations’ pay gaps. Research from Payscale demonstrates that pay transparency closes controlled pay gaps because organizations that are more transparent are also more concerned about pay equity. However, pay gaps are still a problem. Our Gender Pay Gap Report, published March 15, 2022, Equal Pay Day, reported that:

  • The uncontrolled gender pay gap is $0.82 for every $1 that men make, which is the same as last year;
  • The controlled gender pay gap is $0.99 for every $1 men make, which is one cent closer to equal but still not equal. The gap should be zero. It’s not zero.

I am not expecting any significant change in these numbers for the 2023 Gender Pay Gap Report, especially against the backdrop of the cost-of-living crisis and the impact of COVID-19 on women in the workforce. Women left the workforce during the pandemic, and they won’t be able to return if they can’t afford childcare. Without a focus on the uncontrolled pay gap as well as wealth inequality across organizations, the higher paid will continue to get higher pay increases than the lower paid — and the majority of the higher paid are men.

However, I think that there will be more focus on actions to close pay gaps. The last few years have been dominated by the pandemic so commentators have shied away from drawing conclusions, but I think pay equity will become a driving goal in 2023. I think more US companies will be calculating their pay gaps as well as doing legal pay equity checks, partially due to the expansion of pay-data reporting requirements in California, ESG pressure, and of course, pay transparency legislation.

How will leading employers respond to economic uncertainty?

Despite predictions of an economic downturn, news of layoffs in late 2022, and hiring freezes likely continuing into early 2023, many employers are acutely aware that talent shortages persist. Although we can expect unemployment to increase in the December jobs report from the Bureau of Labor Statistics, it’s worth acknowledging that unemployment has been at historic lows for years. Generally, there is a lack of supply in labor markets due to business transformation, employee preferences, a lack of skills in the unemployed, and declining workforce participation. Since the Great Recession of 2007-2008, the workplace has become more employee centric. This only heightened with the COVID-19 recession in 2020.

In other words, no matter what happens with the economy, the employee experience will continue to be key.

Many organizations become defensive in an economic downturn. They go into crisis mode, rushing to reduce headcount and preserve as much cash as possible without realizing how damaging this can be to employee morale. The average recession lasts about 18 months. Short-term, reactive thinking can have far-reaching negative consequences on your talent strategy beyond this timeframe. My advice would be to not follow generic trends but to understand what talent you need to drive productivity and business growth and act cautiously.

Work/life integration will become the next frontier of employee-centric value propositions.

A close cousin to the remote/hybrid discussion is work/life integration which was highlighted by the headline grabbing “quiet quitting” trend on social media and debated in HR circles this past year. We often talk about workplace flexibility in the context of where work is done (particularly in the US).  But we should also consider when work is done. For many with caring responsibilities in particular, flexible work hours became a necessity during the pandemic with schools closed and sick dependents to care for. However, we also saw stress increase as workers felt compelled to continue working at all hours.

In 2023, leading employers will be more focused on helping employees create boundaries and training managers to respect the needs of their employees to work flexibly. Watching the clock will become less important as managers assess success by the output of employees and not the timeframe of their workday. It’s more a case of reframing and communicating transparently what ‘productivity’ means and effectively defining roles.  Employers who show they are mindful of their people’s well-being and respect boundaries will likely see increased effort and therefore sustained productivity as a result.

We will watch the California legislator’s proposal to reduce working hours from 40 to 32 and the results of 4-day week pilots with interest. The UK pilot is halfway through by a group campaigning for a shorter working week, along with Autonomy, a think tank and researchers at Cambridge and Oxford universities. Of the 73 companies in the trial, 41 firms responded to a survey midway through the scheme. Around 86 percent of those surveyed said they would keep the four-day week policy going after the trial ends.

Rise of the career path as a key retention factor

Two key studies this past year highlighted that career progression is at the top of the agenda for many employees. First in January, LinkedIn’s 2022 Global Trends Report revealed that upskilling and opportunities to grow are two of the top priorities for today’s workers, coming in only behind compensation, work/life balance, and flexibility. Then, in September, McKinsey’s Great Attrition Report revealed that employers are failing to understand or get to the bottom of why their employees are not engaged. Their study showed that the top reasons why people intended to quit their jobs are lack of career progression and advancement and compensation.

As more organizations work on their job architecture to comply with pay transparency requirements, they are likely to also take the opportunity to better define and communicate career paths. I would really like to see a proactive focus on this because it is essential to employee satisfaction and engagement. The stark truth is many will not be able to make the same level of investment in wage increases to protect talent in 2023 – and will need to move on from the transactional mindset of a “just pay more” to fix engagement.

I hope 2023 is the year where we start to build solid foundations for sustainable change in compensation management that will see fairer, more transparent pay. I also hope to see employers responsibly commit to actions to reduce pay gaps and achieve pay equity. Beyond this, I hope to see increased understanding in how to engage diverse employees who want career mobility and recognition of work/life boundaries.

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