Compensation Trends 2023: Salary increase is not the answer to inflation

Aneta Samkoff
Aneta Samkoff
Compensation Trends 2023: Salary increase is not the answer to inflation

After the unprecedented economic bounce-back, 2022 finished off with rising inflation and a number of layoffs across the globe. The market seems to be on the way to leveling out, as those trends continue into 2023. Year-over-year hiring rate stalls globally and more often than not, we hear of the upcoming recession.

The tech layoffs in the US continue. If you visit any layoff tracker, you’ll see announcements being posted every single day. And it’s no longer just the States. The cuts are becoming a global phenomenon.

Yet, the need for top talent remains, and the competition for the best has never been tighter.

  • Where does this lead compensation in 2023?
  • What can we expect, and what factors will be critical?
  • How does the situation differ in various parts of the world?

I interviewed experts worldwide to bring you the most up-to-date trends. Here is what we found:

1. Layoffs continue and globalize

Just this past month, Zoom, Dell, GitHub, Salesforce, IBM, Twilio, and others announced that they are slashing positions by 10%-20% of the total workforce. Unlike in 2022, the layoffs aren’t limited to the tech industry anymore but affect e-commerce, logistics, consumer goods, and others sectors. For example, Disney, Yahoo, Newell Brands, and FedEx plan to cut more than 10% of current jobs.

Companies continue to layoff employees

The situation in Europe is similar. The largest European software company, SAP, is laying off 2800 employees. Ericsson, Spotify, Zalando, Alphabet, and Microsoft are cutting their global workforce by 5-10% as well.

Why are the layoffs happening?

The large layoffs result from the unprecedented hiring craze IT companies went through during the pandemic. As we were closed down in our homes, we moved all the activities online. Businesses needed remote technology to function, while consumers demanded e-commerce platforms. The tech and logistics boomed as a result.

Now the demand is plummeting

Now, with the inflation still high and changing exchange rates impacting the budgets of companies operating internationally, both consumers and businesses review their purchases, either postponing or resigning from the non-essential ones. The plummeting demand and canceled deals mean less money for tech companies.

Companies overhired during the pandemic

“Companies hired with a short-term view, growing fast to meet the increased demand during the pandemic. They didn’t take the long-term impact into consideration,” said Rekha Gurnani Chowdhury, the Head of Compensation at the San Francisco tech company Box. “Now, many don’t know what to do with the hired employees as the budgets are running out. The tech sector is facing a dilemma whether to keep salaries low and avoid layoffs or lay employees off and offer some increases,” she adds.

Now, many don’t know what to do with the hired employees as the budgets are running out. The tech sector is facing a dilemma whether to keep salaries low and avoid layoffs or lay employees off and offer some increases

rekha gurnani - small

Rekha Gurnani Chowdhury, the Head of Compensation at Box

Daniel Ek, Spotify’s CEO admitted that’s the case while announcing the job cuts. “Like many other leaders, we hoped to sustain the strong tailwinds from the pandemic and believed that [Spotify’s] broad global business and lower risk to the impact of a slowdown in ads would insulate us. In hindsight, I was too ambitious in investing ahead of our revenue growth,” he said. Spotify is not the only company that overhired during the pandemic tech boom. That the standard behavior at that time.

2. Salary freezes in the US as the market stalls

Salary freezes are the way to go for some companies, but it seems that layoffs are becoming increasingly popular. As inflation eats away at the budgets, no money is available for raises. Twilio’s CEO, Jeff Lawson, stated that they have to “prioritize profit far more than before” and that company "needs to optimize for its environment as it changes."

As a result, we can expect the laid-off employees to begin flooding the market with their severance packages running out throughout 2023. This, in turn, will cause the market to somewhat level out. Particularly so, as the new postings are low and they aren’t as attractive as they used to be.

Given those circumstances, it seems that 2023 will be the year of low to no increases in terms of compensation, at least in the US.

3. Pressure to raise wages in high-inflation areas

In other parts of the world, especially countries with high inflation rates, there is substantial employee pressure to raise compensation. As inflation in many areas exceeds 10%, 15%, or even 20%, workers see their budgets tightening up. And many of those working for the minimum wage began struggling for survival.

Inflation in different countries as of February 2023

Moreover, those expectations are further propelled by the media, for whom inflation is one of the top clickbaity subjects. Titles such as “Inflation is eating away the salaries,” or “Employees say salary isn’t keeping up with inflation,” or “How much should my pay rise to beat inflation?” are building up employee expectations.

Pay raises propel inflation

The crux of the problem is that the solution proposed is simply an inflationary raise or bonus. In effect, such action shifts the duty to remedy the situation onto the businesses instead of governments and institutions that actually have much greater power and responsibility to do so.

It’s true that those working for the minimum wage are nearing the poverty threshold, but we need to realize that they are also the ones that the possible inflation spiral will impact the most. Simply giving the raise is a curse in disguise. In the long run, that extra money may have catastrophic effects on that group.

4. IT builds frustration in the rest of the market

One of the groups responsible for the salary increase pressure is the tech sector. The shortage of employees and careless overhiring caused IT salaries to skyrocket.

Moreover, that’s the group that is expecting the highest inflation-related increases. “IT employees are very well organized, and thanks to that they are able to push the salaries to super-high levels without necessarily providing or producing the value of that worth,” says Anna Morawiec-Bartosik, Compensation Consultant and Co-founder of HR Rebels. “The rest of the market sees those expectations and gets frustrated.” Employees working in sectors that are not developing as fast in terms of compensation cannot negotiate to such a degree. They are left to sit back and observe how the privileged get evermore.

IT employees are very well organized, and thanks to that they are able to push the salaries to super-high levels without necessarily providing or producing the value of that worth

Anna Morawiec Bartosik

Anna Morawiec Bartosik, Compensation Consultant and Co-founder of HR Rebels

As the trends from the US often trickle down to other parts of the world, the series of layoffs in the US land a chance for closing this gap also in other countries. The IT postings are becoming scarcer also in the EU, so the market may start to level out. But the disproportionate differences nevertheless cause even greater frustration of the non-tech employees and build further expectations for the inflationary adjustments.

5. Desire to work remotely leaves services with labor shortages

In addition to IT vs. the rest, we also see the market splitting into occupations with remote work options vs. those without.

The sectors such as services, production, and logistics which cannot and never will be able to offer remote work opportunities, struggle today with severe labor shortages. Not only was their workforce decimated during the pandemic, but even after the restrictions were lifted, it has not recovered.

Young people want to work remotely

“There’s no influx of the new workers to the services, especially among the younger generations. Nowadays, young people value work-life balance and their free time to the extent that determines their choice of a career path,” constates Tomasz Podwysocki, the Compensation & Benefits Director for the Europe & North Africa region at a French multinational hospitality company Accor.

Nowadays, young people value work-life balance and their free time to the extent that determines their choice of a career path. The labor shortage in hospitality is so acute it’s impossible for us to double the hires to offer the prospective employees a more flexible schedule. Money is not the major problem. We simply don’t have enough people. It’s possible that the way we’re used to services may cease to exist.

Tomasz Podwysocki

Tomasz Podwysocki, the Compensation & Benefits Director for the Europe & North Africa at Accor

This is something gen Zers across the globe have in common. It’s true for the US, but also the UK and the entire EU. Unfortunately, remote work is impossible for the services and production. “The labor shortage is so acute that it’s impossible for us to double the hires so that we could offer the prospective employees a more flexible schedule with shorter shifts and more frequent breaks. Money is not the major problem. We simply don’t have enough people,” said Tomasz Podwysocki, “It’s possible that the way we’re used to services may cease to exist.”

6. Raises possible in the understaffed service and production sectors

The acute labor shortages undeniably affect the compensation in services and production.

During the pandemic, as the hotels, restaurants, and factories were closed, the already low salaries suffered further. In that context, those industries have plenty of room to work to improve their compensation strategy. The shortages, coupled with employee expectations of inflationary adjustments, put additional pressure on the hikes. “In the hospitality sector, there is a pay gap with the average market. Only in France is the compensation in the hospitality sector at the appropriate level. This is because hospitality is much more prestigious in French culture compared to other countries. There’s a lot to improve upon, especially that currently the earnings fall below the median,” remarks Tomasz Podwysocki.

In the hospitality sector, there is a pay gap with the average market.There’s a lot to improve upon, especially that currently the earnings fall below the median.

Tomasz Podwysocki

Tomasz Podwysocki, the Compensation & Benefits Director for the Europe & North Africa at Accor

7. Comp&ben analysts need to take responsibility for inflation

The compensation departments need to be very wary about where it’s safe and desirable to grant salary increases in the current environment.

The public in general, and employees in particular, need to be aware that giving into the demands of inflationary raises across the market will almost certainly lead to hyperinflation in the areas where the prices are already moving fast.

Compensation departments hold a crucial role as educators to the workers. They are the ones who need to explain not only their pay philosophy but oftentimes also the economic principles. That’s something that the comp&ben community is aware of.

Businesses, in particular the Compensation and Benefits professionals, need to take greater responsibility for inflation.

Tomasz Podwysocki

Tomasz Podwysocki, the Compensation & Benefits Director for the Europe & North Africa at Accor

“Businesses, in particular the Compensation and Benefits professionals, need to take greater responsibility for inflation,” says Tomasz Podwysocki. Anna Morawiec-Bartosik agrees: “In countries such as Poland, business is facing now a great responsibility not to cause the inflation spiral. Many companies in sectors with dwindling demand simply won’t be able to give in to the pressure, but I am worried about those who are thriving during the crisis. They will have enough money to meet the worker’s demands” she says.

These voices are vital in light of the most recent HR Analytics Research poll by HR Rebels, where we see that 96% of the Polish companies are still planning some form of raises, and an astounding 15% pay hikes equal to or greater than the inflation.

In countries such as Poland, business is facing now a great responsibility not to cause the inflation spiral.

Anna Morawiec Bartosik

Anna Morawiec Bartosik, Compensation Consultant and Co-founder of HR Rebels

If those companies decide to grant inflationary increases and do it repeatedly to catch up with the changing prices, that will lead to a dangerous situation.

On the one hand, we may witness employees move to the sectors with better pay, while employers who couldn’t afford the increases in the first place will be left with little to no employees. On the other, those on tight budgets will need to reduce the workforce in order to keep the critical talent.

What should we do then?

8. Educate employees on your comp philosophy

Compensation departments should limit inflationary raises. And in order to do this in a peaceful and respectful way, we need to turn to education.

Currently, most discussions around pay and increases focus essentially on the numbers. Employees simply don’t know what their position on the market is and why it’s such and not different.

Educating employees with regards to compensation is a work of great value. If done well, it’s a unique opportunity for the employee to understand what they can do to move to the right side of the salary range.

Tomasz Podwysocki

Tomasz Podwysocki, the Compensation & Benefits Director for the Europe & North Africa at Accor

Compensation departments need to work on the paradigm switch and educate the employees with regard to the compensation systems and philosophies at their companies. “It’s a work of great value,” says Tomasz Podwysocki, “if done well, it’s a unique opportunity for the employee to understand what they can do to move to the right side of the salary range. It’s an opportunity to learn what skills they are currently lacking and what to do to acquire them and finally increase their income.”

Rekha Gurnani Chowdhury agrees. “Education on compensation philosophy and transparency on how compensation decisions are made empowers employees by allowing them to feel in control and feel that they have the ability to influence their own compensation levels,” she says.

Education on compensation philosophy and transparency on how compensation decisions are made empowers employees by allowing them to feel in control and feel that they have the ability to influence their own compensation levels.

rekha gurnani - small

Rekha Gurnani Chowdhury, the Head of Compensation at Box

In this way, instead of too well-known salary conversations that boil down to money jostling, we can have more partnership discussions about what either side can do to benefit both. Instead of “asking” for a raise, the employee may learn or offer how they can upskill or perform to increase their income.

Toward the global work economy

Those communication skills, understanding of the market, pricing, and relationship between pay and performance will be crucial in the long term as we are heading towards the global remote work marketplace.

Increasingly more people live in a different location than they work. Programmers from Poland work in the US, and European firms employ Indian software engineers. As an increasing number of companies join Atlassian, GitHub, Payscale, Zapier, and the like in closing their offices, remote work opportunities will only grow.

With the market’s globalization, we may see the employees price their work based on skills and performance rather than location. As a result, the compensation for those positions may level out - a situation that presents both opportunities and threats. Therefore now it’s a pivotal time for compensation professionals, managers, and employees alike to understand compensation and develop skills to discuss it.

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