Employee compensation topic roundup for fall 2023
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Temperatures (and leaves) may be falling, but with the new year on the horizon, critical employee compensation issues are rising. With that in mind, let’s look at what’s happening with employee pay topics.
Merit Budget Projections for 2024
We are starting to see merit budget projections for 2024 be available. According to an article in The Playbook, Wills Towers Watson reports a projected average increase of 4% in salary budgets for 2024, down from the 4.4% average in 2023. Meanwhile, WorldatWork reports that U.S. organizations are projecting 4.1% pay increase budgets in 2024, up slightly from what had been projected for 2023. What is driving these projected increases past the 3% salary budget increases seen in recent years? Employers cite the tighter labor market, worker shortages, and continued high inflation.
Salary Compression Issues
Due to salary pressures the last couple of years on starting wages, many positions are experiencing compression amongst salaries. In fact, we have seen many organizations collapse three and four pay grades into one or two because of how escalating entry level hiring rates have encroached on higher level pay grades. Because organizations have had to focus so heavily on boosting the hiring rate the last two years, they have not had the time or money to address compression. Until now, that is. Fortunately, many organizations are taking action. According to WorldatWork, 69% of employers plan to tackle this issue.
Pay Transparency
Pay transparency isn’t just a good thing; it’s also now the law in eight states, five cities, and one county. States which have enacted pay transparency laws are California, Colorado, Connecticut, Maryland, Nevada, New York, Rhode Island, and Washington. New York’s regulatory requirement went into effect statewide in September. The laws differ in certain ways, of course, with specific provisions ranging from providing pay scale details for a position to an applicant, to including pay ranges on every job posting, to requiring a description of all employment benefits offered for the position. Many newer generations in the workforce have no tolerance for a lack of pay transparency. If your organization hasn’t adopted this practice proactively, you could be at a competitive disadvantage when it comes to recruiting and retaining employees.
Pay Equity
Pay equity continues to slowly move forward. There are currently 42 states that have enacted equal pay laws, acts, or statutes. Some state laws use the term “Equal Work” while others use the term “Substantially Similar Work” in their legal parameters. Regardless, pay equity gaps continue to be quite large. For example, compared to a white man in the same job, women in the U.S. earn 82 cents on the dollar; Black men earn 87 cents; Black women 63 cents; Hispanic men 57 cents; and Hispanic women 54 cents. According to the Institute for Women’s Policy Research, it will take nearly 40 years (2059) before we achieve equal pay just for women, let alone minorities. To gain a competitive recruiting and retention advantage, organizations can and should work hard to close pay equity gaps.
Bans on Salary History Questions on Applications
Legislation has been passed in 37 U.S. cities/states (19 of which are state-wide bans) regarding asking about salary history on job applications. Experts believe such questions perpetuate pay inequity for women and minorities. Even if not required by law, a best practice at the organizational level is to regularly perform market benchmarking and create pay ranges for all positions. Armed with this information, companies do not need to know the salary history of the applicant to make a fair job offer. Rather, they should simply compare the applicant’s experience to the job requirements and experience of others in the same or similar company role and offer a comparable salary regardless of previous wage history.
Companies Cutting Pay for New Hires
Many companies are beginning to pay new recruits less than they did just months ago. While Walmart recently made headlines for cutting starting wages for certain positions, some of the steepest drops are being seen in technology, transportation, and other sectors that experienced hiring wage sprees in 2021 and early 2022. Hourly positions in the service industry are seeing a $1 to $2 lower starting rate per hour. According to data from Gusto, pay rates for engineers and developers have dropped 18% in the past year. A year ago, it would never have been anticipated that starting rates would go down, but regardless of wage rate movement, it is important to be aware of prevailing wage standards. Performing annual market benchmarking can help you remain competitive as you seek to attract the right talent.
New Proposed Overtime Rule Threshold
The Department of Labor (DOL) is once again proposing an increase to the minimum salary threshold for overtime eligibility under the Fair Labor Standards Act. The current minimum (for exemption from eligibility for overtime pay) is $35,568 and the proposed minimum is $55,068. As of this writing, the proposed rule had not yet been published in the Federal Register. Once it is, there will be a 60-day period for public comment. Then, a final rule will be determined and published. The minimum salary threshold is only one of two tests to determine if a position is exempt from overtime. The second test involves duties and responsibilities. If your company has employees between $35,568 and $55,068 on an annualized basis for base pay, it is wise to flag them and conduct the duties test to ensure the positions can still qualify as exempt. Then, when a final rule is published, you can determine if you want to raise your employee salaries to the minimum threshold to continue to keep them exempt from overtime. The DOL is also considering including automatic adjustments to the minimum threshold every three years.
As 2023 winds down, employee compensation topics are seeing a flurry of activity. At Total Reward Solutions, we understand how challenging it can be to deal with new regulations and market conditions, so we make it our business to help clients navigate complex compensation issues.
Cassandra Faurote is the CEO of Total Reward Solutions, a compensation consulting firm and author of Compensation Sense 101: Common Sense Answers to Your Questions About Employee Compensation and Total Rewards. Reach her at cassandra@totalrsolutions.com.