Employers skimped on planned pay raises for workers

Companies shelled out smaller than projected merit raises to rank and file employees while CEOs' compensation rose faster than inflation last year.

Employers pulled back on raises they had planned in November 2022 as labor shortages abate and companies look for savings as the economy slows, according to a compensation planning survey of roughly 1,000 employers from corporate benefits provider Mercer.

When planning raises for workers, firms said they were budgeting 3.9% for merit increases and 4.3% for total increases, on average. 

But in March 2023, when asked what employees received, firms said they'd cut back on pay increases. They actually delivered 3.8% merit increases and 4.1% total increases, on average, based on workers' and companies' performance during the 2022 calendar year. 

Still, the raises are at the highest levels they've been since the 2007-2008 financial crisis.

"But we did see compensation increases are starting to slow down a bit," Lauren Mason, senior principal in Mercer's Career Practice, told CBS MoneyWatch. "The increases that were delivered were slightly below what they were projecting in fall, which means that as organizations went through those final stages of leadership's approval, those compensation budgets were pared back."

Past the peak of compensation increases

Firms missed the mark on projected raises as major employers across industries strive to cut costs. Workers, meanwhile, have seen their cost of living rise amid raging inflation.

Previously, firms had granted some workers off-cycle raises or made them counteroffers in an effort to retain top talent. 

"Many organizations are looking to get greater control around compensation and I think we likely are seeing the peak of annual compensation increases this year," Mason said. 

She expects total annual raises to return to the 3.5% mark. 

Lagging industries 

Workers in the life sciences, energy and services sectors received the most generous total pay raises of up to 4.5% on average. 

Health care, retail and wholesale employees' total pay increases lagged at 3.6% total compensation increases on average. 

Pay transparency  

Pay transparency laws that have taken effect in New York, California and Colorado have lead more employers to rethink and standardize compensation practices, given that the policies arm workers with knowledge like what the base salary and cap are for a given role.

As a result, companies are being more careful about awarding workers pay raises to ensure that they don't create pay inequity within their workforces, according to Mason.

"Pay transparency gives employees more information at their fingertips and creates a lot more questions around compensation and how they're paid relative to ranges they are seeing externally," Mason said. "It's another factor that can increase employees' expectations around pay, so it's important for employers to stay on top of the market and educate employees around how ranges are utilized and how pay is set."