A Look Back at 2023: The Year of Inflation and Adaptation

Last year marked a significant challenge for early-stage companies as they navigated through a period of heightened inflation. Economic fluctuations demanded agility and thoughtful compensation strategies to retain talent without compromising financial stability. The Salary Budget Planning Survey by WTW revealed that employers planned an average increase of 4.4% in their salary budgets for 2023, a response that was slightly higher than the typical adjustments made in pre-pandemic years. 

This response was indicative of the times, with 70% of U.S. employers budgeting for pay raises to be either the same or higher than in 2022. Only a minority, 14%, budgeted for pay raises to be lower than the previous year, despite the economic pressures. This approach was a balancing act between maintaining employee morale and managing the bottom line amidst cost-of-living increases.

Anticipating 2024: Balancing Expectations with Realities

As we pivot to 2024, early-stage companies face a new set of challenges and expectations. WTW’s survey indicates a slight decrease, with salary budgets planning for a 4% increase, reflecting cautious optimism. This dip from 2023’s actual increase aligns with the current inflation trends, which remain a concern but are expected to be less severe than last year.

Employers must weigh these economic indicators against competitive pressures and the need for talent retention. Inflation data, which is publicly available from sources like the Bureau of Labor Statistics, should guide these decisions. For example, if inflation rates are projected to be around 3% for 2024, a 4% salary increase would slightly outpace inflation, maintaining purchasing power for employees.

Best Practices for Compensation Adjustments

As founders and their HR and Finance leaders look to set their compensation adjustments for 2024, here are some best practices to consider:

Establish a Clear Compensation Philosophy

A well-articulated Compensation Philosophy document, agreed upon by the executive team, can serve as the north star for all compensation decisions. This document should outline the organization’s approach to market rate adjustments, performance-based raises, and promotions, ensuring consistency and preventing preferential treatment.

Leverage Reliable Benchmarking Tools

Utilize industry-standard tools such as Pave, Radford, Advanced-HR / Option Impact, and Payscale to make informed decisions based on accurate market data. These resources can help determine appropriate compensation based on role, experience, and market demand.

Define Budgets and Limits

Finance should take the lead in setting overall budgets for merit increases and promotions, possibly allocating funds across departments proportional to their payrolls. To prevent inconsistencies, consider implementing a policy that caps compensation adjustments, such as no more than a 10% increase year-over-year for any reason other than market rate adjustments.

Address Market Rate Adjustments

When employees are underpaid relative to the market, it’s essential to make necessary adjustments promptly. These adjustments may result in significant percentage increases in base pay but are critical for retaining talent at risk of leaving.

Implement Structured Promotion Policies

For promotions, it’s advisable to move employees to at least the midpoint of the salary range for their new role to reduce the risk of turnover. Define clear criteria for promotions and ensure that department heads, with HR’s oversight, maintain fairness and equality in the promotion process.

Conclusion

The journey from 2023’s high-inflation environment to the more stable, yet cautious, landscape of 2024 requires a careful recalibration of compensation strategies. By looking back at the previous year’s trends and learning from them, early-stage companies can set forth a path that aligns with economic realities while upholding their values and commitment to their workforce. As you forge ahead, remember that your compensation strategy is not just about numbers; it’s about the message it sends to your employees about their value and your company’s future.

Jim Gellas
Co-Founder, President, Finance in a Box