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

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Inflation and annual wages are not in a one-to-one relationship. It became clear to many workers last year that the annual increase in their wages and salaries was not close to the high level of inflation in four decades. Many employees protested even though wages were higher than normal in decades and wondered why their wages were not tied to the Consumer Price Index, which reached more than 9% earlier this year. The workers had one point: real wages did not match the prices consumers pay for everything from food to gas and housing.

But most companies have never set wages to match inflation, and never will. When you pay people more, even when inflation comes back down, it’s hard to get it back. Employers paid workers significantly more last year, with an average increase nearly two percentage points higher, at 4.8%, than the standard increase of 3% in recent decades, according to compensation consultant Pearl Meyer data released earlier this year. . .

As inflation eased and there was more confidence that higher prices were in the offing for the U.S. economy, C-suites at least began to ask: When will the standard cost-of-living wage rise enough to go back down again? We heard this from members of CNBC’s CFO Council, but their response to the question so far has been that the labor market is still very tight, and it won’t be until 2023 that executives return to “normal” in regulation. raises.

Downward pressure on the rise, but the labor market is still tight

Pearl Meyer’s latest data on companies in all sectors of the economy also shows that 2023 will not be more than three percent, although there is evidence of downward pressure on the absolute amount of wage growth.

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“There is still a sense across all industries that wage inflation is strong and the demand for talent is still strong,” said Bill Reilly, chief executive of Pearl Meyer.

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Pearl Meyer’s survey was conducted in August and September before the start of layoffs at the biggest tech companies, including Meta, Amazon, Microsoft and HP, and companies could still adjust their plans in the coming months based on economic conditions. workers, including Google Alphabet, were worried. But Reilly said that so far the numbers are “strictly 4%” for executive and executive pay increases. Some companies in sectors where demand is still high and labor supply is still tight, life sciences as an example, are increasing annual salary increases to 5%, he said. Privately held companies on average expect to pay more than publicly traded companies, but the figure represents a 4% average increase in a Pearl Meyer survey of a representative sample of employers across the economy.

High salary?

The data shows that the peak may be in the level of salary increases in many companies. In 2022, the compensation company found that the overall increase for two-thirds of survey participants was more than 4% compared to this year’s median, or 50 percent of 4%. And the salary increase for a quarter of the organizations was more than 6 percent. This year it is 75% in 5%. In 2022, not only did the median approach 5%, but many companies made mid-year adjustments to pay if inflation reached more than 9% in June. A fifth of companies have made “off-cycle” pay adjustments this year.

This year it may be less. However, when Perl Meyer asked compensation decision makers in a survey to identify the challenges they will face in 2023, wage inflation and a tight labor market, along with concerns about the overall economic climate in were at the top of the list. “For many companies, it’s still a seller’s market as it relates to employees and employment opportunities and preferences,” Reilly said. “Slightly down, but still above historical averages,” he said of the overall wage survey findings.

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

This isn’t just about pay, and the flexibility of working from home is just one example.

According to Pearl Meyer, seventy-five percent of the companies in the survey have some form of hybrid work, and one expense that is not planned for next year: any money for office benefits and the temptation to bring more employees back to the company’s workplace.

The Fed, Inflation and the Slowing Economy

The actual rate of wage growth can still change, as it did this year, when raises are initially forecast by companies. Next year may be the opposite, with a strong labor market and employee retention front and center as considerations, but macroeconomic challenges are increasing and driving companies to cut their salary budgets. Reilly said some industries will struggle more than others or be overly cautious due to the economic outlook, holding back their decent growth projections. But he added, “it’s likely that most of them are generous on a broad level.”

A member of CNBC’s CFO Council recently told us that the big risk in the Federal Reserve raising interest rates is that the labor market is a lagging indicator that looks strong for most of the first period of rate hikes, but then cuts across the board. the economy is growing very fast. that the central bank adjusts its policy. Despite these C-suite fears, the data shows that even amid all the talk of recession and layoffs, 99% of Pearl Meyer survey respondents said they see merit-based growth for broad employee pools by 2023. “The thing is, most people weren’t referring to a wage freeze, and 4% was a solid number, and it seems to be consistent with other external data, and we’re pretty confident in that 4% as the market number,” Reilly said.

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How long will the higher rise last? Could the standard 3% annual growth be a permanent thing of the past? The Fed’s policy shift is aimed at bringing inflation back to its 2% target, forcing higher unemployment on the way there as part of that economic stimulus. But the Fed is also facing renewed pressure from the market to accept that the 2% target is outdated and not good for the economy.

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

Although inflation and rising wages are not in a one-to-one relationship, there is certainly a connection.

Pearl Meyer’s research shows that merit increases are a lagging indicator of inflation and costs. As inflation moderates over time, as the Fed’s actions work in the economy, wherever it ends up, this should turn into a deceleration. “But I couldn’t tell you if it’s 2024 or 2025, another year or two above average,” Reilly said.

And as for going back to 3% or 3.5%, “It’s not next year,” a CFO board member told CNBC in a recent interview. And it was a CFO from the technology sector.

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