While it may feel like the last pay increase cycle just wrapped up, the 2023-2024 salary increase budgeting season is upon us. This year, HR and compensation professionals are once again faced with a challenging economy when it comes to determining their pay increase strategy.
Although in many respects the same economic pressures are being felt across the globe, some nations have been impacted to a more extreme degree, especially those in Europe. Even during this turbulent time, we are observing strong wage growth in 2023 and a steady commitment to continuing that growth for 2024.
Research from Payscale indicates that despite economic uncertainty, in 2024 the average pay increases in Europe are expected to be 4.2 per cent, which is slightly higher than the average of 3.8 per cent reported for the U.S. When looking at the expected increases for 2024 and those of the last few years, it seems possible that the 3 per cent increase may have become a thing of the past.
The fact that wage growth is not stagnating — despite economic issues — suggests that other factors are at play when employers in Europe are deciding on their labor budgets.
Continuing labor budget growth
Planned salary budget increases for 2024 are an average of 5.9 per cent in European countries, with the highest in Poland (6.1 per cent), according to Payscale’s 2023-2024 Salary Budget Survey: Europe Edition.
Increases planned for 2024 in Europe (combined) were slightly lower than 2023 increases for all employee groups, apart from exempt (non-management) employees, whose 2024 planned increases were 0.5 per cent higher than actual increases in 2023.
The strategy for salary budget increases in Europe sends a clear message that despite recession and inflation conditions throughout the continent, compensation professionals are focused on winning top talent.
Prioritizing workforce retention
In situations where inflation is high, strong pay growth estimates are often expected. Employers know that employees hope to have the decline in the value of their salaries offset by higher compensation packages.
“Labour is likely to remain unusually scarce, especially in the core euro area countries, also for demographic reasons, unless there is a deep recession,” according to Commerzbank economist Joerg Kraemer. “The bargaining position for unions and employees should remain strong.”
When faced with hard-to-fill vacancies, employers also seem to be prioritizing workforce retention and engagement, opting to ramp up pay budgets for the most vital and highly skilled employees while cutting costs in other areas. The projected increases also indicate that compensation professionals may be taking a more long-term view of their budgets, with the knowledge that recessions typically last no more than a year.
Meeting legislative requirements
The EU Pay Transparency Directive is likely also having an impact on organizations’ salary budgets for 2024. The new requirements mark a significant change for most organizations and salary budget season provides the perfect opportunity to make internal pay equity adjustments.
When we surveyed organisations at the end of 2022, 15 per cent of those in Europe said that preparations for pay transparency would be a factor in their base pay increases in 2023. The majority (56 per cent) also said that recent pay transparency legislation has driven them to change or improve their compensation practices.
Indeed, before sharing pay ranges with employees and job candidates, it is important to first be certain that employees are being paid fairly to market. It’s also imperative to confirm there are no significant pay gaps between employees with the same jobs or doing similar work.
Optimising salary budget salary data
Compensation and HR professionals play a pivotal role in ensuring that an organization’s salary budget strategy aligns with business goals, industry standards, and employee expectations. Before walking into the next salary budget review, compensation professionals can use the salary budget data available to:
- Demonstrate adaptability and agility in salary budget strategies
- Embrace innovative approaches to maximize the impact of total rewards
- Build compensation programs that enhance employee engagement.
Recent years have been more difficult than most in determining if and how salary budgets will change due to highly dynamic contributing factors. In addition to salary budget reports, organizations need to keep an eye on wage growth trends and continue to invest in up-to-date market data to ensure that pay is fair whilst also remaining competitive.
As leaders, it’s important to capitalize on the insights available to elevate the impact of compensation. Understanding the external factors impacting pay decisions is key to ensuring compensation investments deliver competitive pay programs. This is a time when compensation and HR professionals can provide an informed recommendation about salary budgets, based on what they’re seeing in the market as well as on the realities of their organization.
For insights on projected salary budgets from compensation professionals serving organizations in Europe, click here to download Payscale’s 2023-2024 Salary Budget Survey: Europe Edition.
This article was originally published by the Reward & Employee Benefits Association (REBA).