As inflation continues to rise (albeit a little more slowly this month than the last few), and as a global recession lurks just over the horizon, people and companies everywhere are feeling the pressure. Some companies made the hard decision to lay people off in the last weeks of 2022 and early 2023. Others are battening down and seeing where they can cut corners and increase efficiency and productivity without sacrificing their hard-won talent. 

Whether you’ve instituted layoffs or not, your people are still the ultimate drivers of long-term business success and growth. Keeping them happy must remain a top priority, and like businesses, individuals feel the economic crunch. They may ask about raises and find a new job if they don’t receive one.

Is holding off on merit increases holding off on growth?

When it comes to deciding on merit increases, business leaders may find themselves facing a dilemma. On the one hand, wage freezes and bonus cuts can seem like the best way to preserve the business’s bottom line. On the other hand, strategic compensation incentives are crucial for retaining the key talent you’ve fought so hard to find over the last few years.

To put it simply: It’s complicated. So, we’re going to dive into the complexities modern business face concerning compensation and talk candidly about what business leaders (CFOs, CEOs, CPOs)  must consider when deciding whether to give merit increases or institute a wage freeze.

What are merit pay freezes really about?

Ultimately, merit pay freezes are about uncertainty surrounding growth. And market volatility naturally sparks high rates of uncertainty about the future of businesses. 

According to Adam Barnett, a partner at Human Capital Solutions, Aon, “rising economic uncertainty and increased market fragmentation are making salary increase planning especially difficult this year.” So, if you’re finding it hard to decide what strategy is best for your business, you’re not alone. 

To better understand how to approach merit increases or freezes, it’s worth looking at some industry benchmarks and how other organizations think.

What are the compensation benchmarks on average merit increases for 2023?

According to data from SHRM, the “labor market and inflationary pressure” are driving “higher-than-projected salary growth.” Companies in the US are expected to increase pay by an average of 4.6 percent in 2023. That’s up from 4.2 percent in 2022. The reason? Pressures from inflation and “the ongoing challenges of finding and keeping workers.”

HiBob research completed in December 2022 dives even deeper: Of 300 HR leaders surveyed worldwide, 66 percent reported that their companies plan to increase salaries within the next few months (between 1 and 5 percent). Only 14 percent of companies plan to institute a freeze.

But, whether you plan to freeze salaries or give increases, it’s critical to always keep sight of what really drives your business forward. This means employee satisfaction must remain a top priority. 

As Hatti Johansson, research director for reward data intelligence at WTW, stressed in response to the SHRM data, “companies are using a range of measures to support their staff during this time … Organizations should prioritize their actions based on the needs of both employers and employees and pay close attention to market data to inform any changes.”

Keep your people in the loop

One of the keys to meeting your people’s needs and keeping them happy, no matter what direction you take with merit pay raises, is being transparent and honest about the state of the business. Don’t surprise your team. Tell them what’s happening and why.

Let your people know what you’re discussing in the boardroom and between C-level management. Most importantly, let them know that not giving merit increases isn’t about slighting them: It’s about preserving the business and their jobs. While this might seem counterintuitive, it’s simply about the numbers, especially for high-growth startups reliant on investor funding and revenue to keep the business running.

Covering the weight of business in the modern world

The reality of today’s world economy is that business health is measured by growth. Because many modern companies rely on investor funding alongside revenue to stay in the green, business strategy can get complicated. And with record inflation and the threat of a recession, things can get even trickier—especially when it comes to providing merit pay raises.

Business growth formulas don’t typically include merit increases. To preserve people’s jobs, the business engine, and investor confidence, business leaders need to buckle down on demonstrating growth, efficiency,  and even more productivity. 

This could mean increasing headcount and expanding into new geographies. It’s the key to boosting sales, revenue, business development, and profit. When businesses show their investments in each of these (especially in economic downturns), it builds investor confidence and preserves jobs. 

It also prevents burnout, avoiding the need to take on more work, whether it’s the work of unfilled open positions or teammates who were laid off. Ultimately, increasing headcount and going global avoid the high costs of turnover and recruitment.

In budgetary terms, it comes down to the math. For example, an annual merit increase to 500 existing team members may cost the same as hiring 20 new people in customer service or sales. These new joiners are exactly what the company needs to boost customer satisfaction and revenue. In other words, they’re the key to demonstrating business growth.

Economic downturns and people-first management

Deciding whether to provide merit increases in 2023 depends on the economic climate and your business’s financial standing. When holding discussions on merit increases, decision-makers must ask tough questions and rely on data to make informed decisions: 

  1. How much runway do we have before we have to start making some hard cuts?
  2. What’s our cash flow?
  3. What’s our growth trajectory, and how do we plan on meeting growth goals?
  4. Who can we identify as critical to our talent pool and business engine?

In the spirit of keeping things transparent, let your people know the answers to these questions and why you’ve decided one way or another on merit pay. If you have to freeze wages, remember that compensation doesn’t always have to involve hard cash. 

Non-cash ways to comp your people

People expect work-life balance. If they feel too much pressure, your business will suffer the costs of burnout and lose more. The winning formula is keeping your people happy with benefits beyond cash compensation.

Today’s professionals value a variety of compensation and benefits. If they’re engaged and serious about their work, they’ll understand why you’ve decided to freeze wages and appreciate the alternatives. Talk to your people about what would make work life more manageable, keep them more engaged, and inspire productivity. 

If possible, leverage HR tech: Send out anonymous pulse surveys to gain deep insights into what comp and benefits your people need and want. Can you offer employee wellbeing and mental health programs, schedule flexibility, more autonomy, L&D and professional development programs? 

What about cutting costs and boosting productivity with a four-day workweek? SHRM research found that 60 percent of organizations with a four-day workweek enjoy more productivity and employee satisfaction. You can also consider instituting no-meeting policies on specific days, or even removing recurring meetings from people’s schedules to prevent burnout (we’re looking at you, Shopify).

You can offer benefits like these in lieu of merit increases while leveraging them to build a winning, people-first business strategy that keeps your people happy, investors confident, and your business lean.

Recession-proof your business with a global strategy

Another great way to weather economic downturns and inflation and keep your business as lean and agile as possible is to expand globally. 

Going multi-national is key for connecting people strategies with long- and short-term business strategies. When the cost of living and business expenses rise in specific geos, having options in others with lower costs cuts expenses before you’ve spent a cent. 

It’s why, according to the HiBob research mentioned earlier, many modern businesses have already gotten the memo about growth being the way through economic downturns: 54 percent of respondents said that despite the economy, they’re planning to grow their teams by 11 percent or more.

In addition, 45 percent plan to expand into new geographies. And the main reasons why? Goals to spur growth in new markets and investments (48 percent) and to build a global presence (21 percent).

Opening new sites introduces new markets, diversifies your talent, and demonstrates business growth, reducing overhead and boosting your bottom line.

Relentless honesty and transparency solve the merit pay dilemma

Change and uncertainty are ever-present truths in today’s world. There’s no “new normal.” 

It’s impossible to predict what will happen tomorrow, despite today’s outlook. Markets will always follow bearish and bullish cycles, and your people will always want answers about pay increases, benefits, and whether to expect layoffs when markets go south.  

Getting merit pay policies right and leading your critical talent through this marathon of market uncertainty takes a village, patience, and access to comprehensive compensation benchmarking and business data, plus lots of honesty, trust, and transparency. 

Ultimately, the decision to give or withhold merit increases hinges on the state of your business and fiscal runway—and the strength of the workforce you rely on to drive success. The key is to support your people, show them you value them, and keep their confidence about their place in your business strong.

Tali Sachs

From Tali Sachs

Tali is a content marketing manager at HiBob. She's been writing stories since before she knew what to do with a pen and paper. When she's not writing, she's reading sci-fi, snuggling with her cats, or singing at an open mic.