Over the last few years, the working world has experienced a variety of challenges. From the pandemic to the Great Resignation to today’s continued economic turbulence, organizations have had to rethink what the world of work looks like, especially when it comes to compensation.
Your compensation strategy affects how well your organization is able to recruit and retain top talent, but your strategy doesn’t play out in a vacuum. Competition trends will affect your organization’s approach, whether you’re a small business or a large nonprofit. Keeping a pulse on these trends can help you fine-tune your own strategy in the larger context of what is going on in the economy.
To help you stay in the know, we’ve curated and interpreted the most up-to-date compensation trends your organization should know about, including:
- Base Pay Trends for 2023
- What’s New With Variable Compensation in 2023
- What Executive Compensation Will Look Like in 2023
- Benefits Organizations Are Prioritizing in 2023
- 6 Resources for Keeping Up With Compensation Trends
- Astron Solutions’ Compensation Philosophy: Total Rewards
We’ll also provide our own perspective and recommendations for your organization to keep in mind based on the work we’re doing with our clients to navigate these trends.
Even if some trends don’t pertain to your organization at its current capacity, they’re still good information to have and can prepare you to scale up your operations in a sustainable way when the time comes. Let’s take a look at what is currently going on in the realm of compensation.
Base Pay Trends for 2023
As your organization budgets for base pay adjustments in 2023, you’ll need a strong understanding of the health of the U.S. economy. Here are some things to keep in mind.
Different Forecasts for the 2023 U.S. Economy
Some experts have forecasted a major recession and the return of higher unemployment later in 2023. Others have taken a more optimistic view, seeing inflation coming down but unemployment remaining low.
According to Goldman Sachs, there is a 35% chance that we’ll experience a recession in 2023. This is higher than Goldman Sachs’ prediction of 15% in 2022, but their experts remain optimistic: “We think that a continued period of below-potential growth can gradually rebalance supply and demand in the labor market and dampen wage and price pressures with a much more limited increase in the unemployment rate than historical relationships would suggest. Additionally, while the Fed tightened financial conditions substantially last year, the impact on GDP growth is likely to diminish this year. Like other macro models, our analysis shows that the peak impact of rate hikes on GDP growth is front-loaded. In other words, the drag on U.S. GDP growth from recent aggressive Federal Reserve policy will fade as 2023 progresses.”
An Alternative Economic Indicator: The Cardboard Box
While there are many experts that voice their opinions regarding how the economy will play out in 2023, there is one often overlooked economic indicator that has been very consistent in predicting how strong the economy will be year after the year—the Cardboard Box Economic Indicator.
Most, if not all, durable goods manufactured in the U.S. are shipped in cardboard boxes. This industry must be ahead of the curve to be sure that the cardboard containers are available to meet the projected demands of the manufacturers.
Here is a projection graphic from AnythingResearch, updated as of March 2023:
As can be seen, the indicators show relatively slower growth from 2023 to 2024, consistent with other experts’ warnings of an upcoming recession.
The Impact of the “Unofficial” Minimum Wage
The “unofficial” minimum wage continues to grow and is having a dramatic impact on internal pay structures. Continued movement beyond $15 an hour towards $20 an hour has created serious internal compression among employees, especially for those who supervise employees. Here are some highlights from a list of companies that have established a $20 minimum wage:
- McCormick & Co Inc.: Blending machine operators earn over $20 an hour.
- Land O’Lakes, Inc.: Starting machine operators make $20 an hour, while maintenance mechanics make over $25 an hour.
- The Kraft Heinz Company: Quality specialists earn at least $22 per hour.
- Pfizer: Entry-level positions earn about $28 to $30 an hour.
- Johnson & Johnson: R&D jobs begin at $25 an hour, while admin positions start at around $20 an hour.
- Chanel: Mid-level fashion designers earn about $35 an hour.
- Hobby Lobby: Retail managers earn $27 and $36 an hour. The company’s full-time workers begin at $18.50 (a starting wage that’s way higher than many retail companies in the country).
- Walmart: Store managers start at $35 per hour.
- Costco: Costco mid-level associates earn about $20 an hour.
- Century 21: Real estate agents earn a minimum of $24 an hour.
Summary of 2023 Salary Adjustment Predictions
According to a Willis Towers Watson survey, employers are planning to up employee salaries in 2023 in the biggest projected hike in 15 years.
Although it’s a new recent high, it’s not by much. Companies, on average, are budgeting a 4.1% salary increase for 2023, just above 2022’s 4% increase. Here are some other notable findings:
- The 2022 and 2023 salary increases are the largest since the Great Recession of 2008.
- Nearly two in three (64%) of U.S. companies are budgeting for higher pay raises than last year, while two-fifths (41%) increased their budgets after original projections were made in early 2022.
- Less than half of companies (45%) stuck with the pay budgets they set at the start of 2022. Concerns over the hot job market—which is seeing a record number of employees leave their jobs for better opportunities—are overwhelmingly driving salary increases, with nearly three in four survey respondents (73%) citing the competitive market as their top factor.
- That’s followed by employee expectations for higher increases that are driven by inflation (cited by 46% of respondents) and anticipation of stronger financial results (cited by 28%). “Compounding economic conditions and new ways of working are leading organizations to continually reassess their salary budgets to remain competitive,” said Hatti Johansson, research director of Rewards Data Intelligence at WTW.
Astron Solutions’ Perspective
The following recommendations are based on current client activity and budget discussions regarding 2023 budgeting:
- The trend is pointing to base pay budgets of 4%–5%, with 5% becoming more prevalent.
- Clients also are establishing contingency budgets of 1%–2% of base pay for potential additional market adjustments if the current labor availability does not loosen up.
- Clients also are budgeting for one special employee bonus of 2%–3% to use as a retention bonus in 2023.
What’s New With Variable Compensation in 2023
Variable compensation can be a powerful aspect of a compensation package. Here is some information to take into account as you draw up your vision for variable compensation in 2023.
Issues that Are Impacting 2023 Variable Compensation Planning
It’s challenging to predict how variable compensation will unfold in 2023. The challenges come from ongoing talent shortages, as well as the continuation of remote work options.
According to Yahoo, Willis Towers Watson’s 2023 Salary Budget Planning Report offers these additional insights:
- 94% of respondents struggled to attract talent in 2022, but only 40% expect the same challenge in 2023. Similarly, 89% of organizations struggled to retain talent in 2022, but only 60% expect the same challenge in 2023.
- 49% of organizations are continuing to boost recruitment efforts by offering sign-on bonuses and equity/long-term incentive rewards, with over 21% planning or considering a similar approach in the future.
- In an effort to retain talent, almost 40% of companies have changed their compensation strategies (e.g., base salary and short- and long-term incentive plans) and 35% are planning to.
Variable Pay Projections
We can better understand how variable pay will play out in 2023 by also reviewing what happened in 2022. According to Empsight’s 2022 Policies, Practices, & Merit Survey:
- In 2022, Empsight saw big changes in larger structure movement percentages, richer budgets, and richer short-term incentives.
- In 2022, there was a notable increase in the number of specialized salary structures designated for geography, or distinctions for Classification or Job Function categories.
- Respondents mentioned shifts in budget control to achieve more flexibility in a fast-moving and competitive hiring market.
- There was a significant increase in promotion and adjustment budgets.
Short-Term Incentives (STI)
Empsight offered comments about organizations whose STI payouts were higher in 2022 than in 2021:
- Payouts were higher in 2022 because payouts in 2021 were much lower than normal.
- Some organizations used operational vs. profit measures because some industries haven’t fully recovered from the pandemic
- Improved business performance led to higher payouts.
- There was a higher funding pool for payouts.
- Payouts resulted from pre-determined business goals.
- Actual performance outperformed target performance.
Empsight also offered comments about organizations whose STI payouts that were lower in 2022 than in 2021:
- Performance was good, but not as good during 2020.
- Organizations were impacted by an increase cost of materials, winter storms, and poor operational results.
- The organizations weren’t meeting target criteria.
For organizations whose STI payouts were about the same in 2022 as in 2021, Empsight said that some companies that had poor performance in both 2021 and 2020 had STI payouts that were about the same in both years, with the trend continuing in 2022. For these organizations, business unit performance was also consistent.
Long-Term Incentives (LTI)
Here are Empsight’s findings on LTI rewards for 2022:
- A few participants commented that new and more discretionary approaches are being employed.
- Only a few participants noted their companies had revised performance measures or redesigned targets and vehicles.
- Findings suggest that there has been an increase in eligibility for LTI plans, particularly for professional individual contributors, support, and operations support personnel, where eligibility has increased.
- There is an increasing LTI target percentage for all levels.
- LTI targets are based on dollar amounts, not percentages.
- Participants are using more restricted stock units (RSUs) to substitute for performance unit awards that will not be paid out.
- Some organizations are offering discretionary eligibility for those who are not normally eligible.
- There has been an expanded use of one-time equity grants and ad-hoc RSU awards.
- RSUs and performance stock units (PSUs) are being used more, with movement away from stock option awards.
- Organizations are offering increased LTI eligibility down to lower levels, specifically directors.
- LTI eligibility requirements are changing to provide great equity amounts.
Variable Compensation Budgeting: What Happened in 2022 and What is Planned for 2023
World at Work’s 2022-23 Salary Budget Survey revealed the following about variable compensation budgets in 2022 and 2023:
|2022||Hourly||Non-Exempt Salaried||Exempt Professional||Officers/Executives|
|% of Base Budgeted||5.0%||5.0%||13.0%||40.0%|
|% of Base Paid||5.0%||5.9%||14.9%||41.0%|
|% of Base Budgeted||5.0%||5.0%||14.0%||40.0%|
Astron Solutions’ Perspective
The following are four key trends Astron Solutions tracked in 2022 that provide insight into planning for 2023:
- We have seen a marked increase in the use of variable pay for non-profit executives and department-level managers. The trend has been to set targets between 15% and 30% of base pay, with actual payouts varying based on performance.
- Organizations’ increased use of discretionary bonuses is helping to offset current inflation levels. For example, some of our clients are providing a one-time 3% bonus in lieu of a second base pay adjustment in the course of a 12-month period.
- Rather than focusing on performance, some clients are linking the level of incentives to employee competency. For example, learning-level employees do not receive any incentives, fully competent employees receive a target-level incentive, and advanced-level employees are eligible for two to three times the budgeted target amount.
- There is an increased use of the “scorecard” approach in determining “goal-sharing” incentive awards. This approach provides transparency in how incentives are determined and paid out, beneficial in a world demanding increased transparency in pay.
Of course, there are many factors outside our control that can impact actual incentive payouts within an organization. The continued effects of the COVID-19 pandemic, inflation, supply chain disruptions, and the war in Ukraine are but four that come to mind immediately. While we cannot be certain of any incentive plan’s payout amounts in 2023, we can be mindful of internal and external considerations, and weave them into the plan’s design.
What Executive Compensation Will Look Like in 2023
Executive compensation presents unique challenges for both for-profit and nonprofit organizations. Here’s what we’ve learned about executive compensation in 2023.
Pearl Meyer’s “Looking Ahead to Executive Pay Practices in 2023” survey findings show the following:
- Most respondents plan to increase executive base salaries in 2023.
- 60% of respondents anticipate executive performance goals will be similar in 2023 to what they were in 2022, while 40% plan to focus on more aggressive goals.
- Most respondents did not plan to make changes to short-term and long-term incentives, but those that are will mostly be adding new performance metrics. 12% of respondents are planning on incorporating environmental, social, and governance (ESG) metrics into short-term incentive plans.
- 10% of respondents are anticipating long-term incentive participation levels to increase in 2023.
- Most respondents have not provided or are not planning to provide retention awards to executives.
Candid released its 2022 Nonprofit Compensation Report in September. Here are some highlights to remember:
- The 2022 report found that while median compensation for CEOs increased by 4.7% overall, it decreased by 5.2% for nonprofit organizations in the largest budget band (>$50 million).
- Here’s what Candid had to say about this finding: “We don’t know for certain that this is a direct impact of COVID-19, nor are we certain why larger nonprofits saw this decrease while smaller nonprofits saw an increase or held steady. It’s not the first time we’ve observed this trend, but it looks to be the largest decrease we’ve seen in quite some time. It will be interesting to see if this trend continues.”
- The pay gap is on a slow decline, but median compensation for female CEOs is still behind median compensation for male CEOs in all budget groups.
- Women lead 64% of responding organizations and far outnumber men as leaders of small-to-medium nonprofits. At the largest budget categories, men outnumber women.
- Science and tech research and health-related organizations had the highest median compensation, while religion and animal-related organizations had the lowest.
- Nonprofit executives in Washington, D.C. had the highest median executive compensation, followed by New York and Massachusetts.
- Only 13% of responding organizations have a CEO of color.
The Need to Re-Educate Nonprofit Boards on “Reasonable Compensation”
The National Council of Nonprofits recently identified an issue involving nonprofit boards understanding their responsibility of maintaining “reasonable compensation” for their executive director/CEO and other disqualified positions. The Council’s article on executive compensation offers reminders of a board’s responsibilities related to executive compensation and the overall importance of these responsibilities:
- The IRS recommends that nonprofits follow its three-step process to determine reasonable compensation (See also Treas. Reg. § 53.4958-6(a)).
- The board should have an “independent body” conduct a “comparability review.”
- The person receiving the compensation should not be involved in this review process.
- During the comparability review, the independent body will look at comparable salary and benefits data to learn what similar nonprofits pay their leaders. The IRS will look at the independence of any compensation consultant used, and the quality of any study, survey, or other data used.
- Compensation includes salary and benefits. The Form 990 instructions include a glossary of terms that shows how and where to report types of “other compensation” that are included.
- The independent body conducting the review should document who was involved and their “independence” (i.e., that they do not receive compensation from the nonprofit), the process used to conduct the review, and the disposition of the board’s decision to approve the leader’s compensation. Meeting minutes work well for this purpose.
- The nonprofit should have a strong conflict of interest policy in order to ensure fair and reasonable compensation, as well as financial transparency.
Note that during the pandemic, many nonprofits deferred compensation discussions. But with a return to some normalcy, boards are once again making these decisions that are impacting the executive team.
Drivers of Nonprofit Executive Compensation
The Nonprofit Quarterly released a study in 2017 examining the drivers in determining compensation levels for nonprofit executives. The findings are still relevant for 2023:
- With commercialization and an increase in competition from both for-profit and nonprofit organizations, how nonprofits are thinking about executive compensation practices has shifted dramatically.
- Some nonprofits have moved from fixed salaries to packages that include variable cash-compensation components based on fundraising, cost reductions, or specific program outcomes. However, these plans are sometimes resisted because of their emphasis on financial measures rather than mission fulfillment.
- Nonprofit managers are seeking comparable pay to that of business managers.
- The practice of benchmarking nonprofit and for-profit executive salaries has become more prevalent in the U.S. as the IRS has allowed sanctions and fines to be put on nonprofits that pay their executives excessively (relative to similar for-profit and nonprofit organizations).
- In most of the nonprofit world, base rates of pay increase in direct proportion to every $1,000 of operating expenses.
- Executive compensation is more sensitive to organizational size and free cash flows than performance, and compensation is much higher in the presence of free cash flows.
- Nonprofits’ outputs are complex, making it hard to develop solid outcome measures and establish any causality between program activity and impact. This means that nonprofits have to rely on other factors for determining executive compensation.
Astron Solutions’ Perspective
Taking into consideration the above information, as well as our read on the executive compensation market, Astron Solutions has our own viewpoint on the topic. The following perspectives are based on recent client projects (specifically projects on nonprofit executive compensation) and our vision for 2023:
- Boards have become more in tune with decisions regarding market strategy and philosophy, especially in identifying the universe to include in benchmarking compensation levels.
- The use of IRS Form 990 in the benchmarking process has come into question based on the age of the data available (often two or more years old) and often the lack of current deferred compensation arrangement reporting. 990s often do not provide the complete picture of how executives are compensated. The focus has been more on available published data from major consulting survey houses than on 990 data.
- Boards have increased their interest in “deferred compensation” arrangements as a way to provide a “golden handcuff” to retain key executive talent. The use of 457(f) plans grew during 2022 and will continue in 2023.
- With better strategic planning, boards are becoming more comfortable in setting up “goal-sharing” incentive plans utilizing a scorecard methodology and linking those plans to the organization’s larger strategic plan.
- The focus also has moved away from individual executive incentive plans to team-based plans in which all executives share in the results of key strategic goals. This “one for all, all for one” approach strengthens executive leadership in terms of team support and interaction.
Benefits Organizations Are Prioritizing in 2023
According to SHRM, the pandemic has significantly shifted how we view benefits, and individual needs have changed, too. Here are some of the top benefits employers are offering in 2023:
- Continued workplace flexibility: Three years out from the eruption of the COVID-19 pandemic, remote and hybrid work are still popular. According to Forbes, some employers are steering toward more hybrid models, or trying to discover new options for continued flexibility while encouraging a return to the office for at least part of the work week.
- Financial well-being education: As we experience a rocky economy, some employers are offering financial well-being programs that serve to educate employees about how best to manage their finances and find more holistic financial well-being with their compensation packages.
- Abortion travel benefits: With the overturning of Roe v. Wade, some employers are supporting women’s health by supporting access to safe abortion care. Willis Towers Watson found that 16 percent of employers planned to offer abortion travel benefits in 2023, with 21% of employers considering doing so.
- LSAs: As we explored in a recent Astronology® article, some employers are leveraging lifestyle spending accounts (LSAs) to help employees cover the costs of expenses like gym memberships, home office equipment, grocery delivery, or daycare.
6 Resources for Keeping Up With Compensation Trends
There’s one thing that your organization can be sure of when it comes to the compensation landscape—it’s always changing. The good news is that you don’t have to wait for end-of-year summaries or projections to stay up-to-date on the trends. Here are some resources you can turn to for general information:
- Cost-of-Living Adjustment (COLA) Information from the Social Security Administration
- Employment Cost Index from the Bureau of Labor Statistics
- News articles from Forbes, Harvard Business Review, SHRM, and WorldatWork
Astron Solutions’ Compensation Philosophy: Total Rewards
At Astron Solutions, our consultants recommend a total rewards approach to plan your compensation strategy around hot trends. A total rewards approach takes into account both direct and indirect forms of compensation:
- Direct compensation: This includes the financial aspects of a compensation package like salary or base pay, incentive pay, allowances, bonuses, overtime, and equity benefits.
- Indirect compensation: This includes all of the non-financial aspects of a compensation package such as traditional benefits (health insurance, retirement, PTO), workplace flexibility, performance recognition, career development opportunities, and miscellaneous perks (e.g., a company car or phone).
Many organizations turn to a total rewards compensation philosophy to help strike a better balance in how they compensate their employees, which can be especially valuable for companies or nonprofits working with lean budgets. Plus, a total rewards approach helps you provide a more holistic compensation package that can have a greater positive impact on your employees and your retention rate.
Our consultants can help your organization transform its compensation strategy using a total rewards framework. If you’re ready to take action on the compensation trends we’ve outlined above, contact us today!
In order to ensure your compensation strategy is helping your organization recruit and retain top talent, you need to understand your organization’s compensation context. Staying on top of current compensation trends can help you understand that context and keep your compensation strategy strong.
Looking for more information about compensation? Check out some of our other articles:
- Communicating Compensation to Your Employees: A Quick Guide. How you talk about compensation matters. Learn how to communicate compensation with transparency and candor.
- Executive Compensation: Taking Charge of Your Organization’s Approach. Designing effective executive compensation can feel like navigating a minefield, but a foundational understanding can help. In this article, we demystify executive compensation for nonprofits and for-profit organizations.
- Employee Compensation 101: What Your Org Needs to Know. Get back to the basics with this comprehensive guide to employee compensation. In it, we talk about measuring compensation, designing a successful strategy, and how a consultant can help.
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