Latest / C-Suite Perspectives / Salary Budgets Are Flat—But Jobs and Skills Are Changing Fast

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Salary Budgets Are Flat—But Jobs and Skills Are Changing Fast · C-Suite Perspectives

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  So there are a number of different skill sets that actually count equally
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  or almost equally as AI skill sets.
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  And you need to reward people that are delivering value to the business, and
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  that's what it really comes down to.
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  Employees experience inflation personally, and we acknowledge that.
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  But companies have to price labor competitively.
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  Diana, your team has recently published this new study called US
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  Salary Increase Budgets 2026-2027.
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  Title that just rolls off the tongue, Diana.
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  Yes.
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  Welcome to the show.
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  Thank you for having me.
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  Yeah.
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  So where can our listeners find your new study here?
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  They can find the study online.
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  The headline for this study really is that, Salary Increase Budgets,
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  which is, yes, a very exciting headline and a very exciting title.
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  But they can find it at tcb.org?
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  Tcb.org, absolutely.
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  If you look under Centers, it's the Human Capital Center, and it
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  should be right at the top there.
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  It should be right at the top.
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  And we've been doing this report for 41 years, which is why we keep this title
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  the same because it is a classic title for anybody in compensation in the HR field.
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  And for everybody in finance who are trying to figure out
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  how to plan for the coming year.
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  So 3.5%.
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  Talk about how the study was done.
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  These are hundreds of companies and a lot of input goes into this.
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  It's not just a number that comes out of thin air.
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  No.
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  We've done this for 41 years, like I said.
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  We typically have between 300 and 400 respondents.
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  It's a rather long survey, very detailed.
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  Participation is high every year.
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  Compensation experts and professionals are very eager to participate
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  because they want the data from this.
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  Yeah.
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  It's Really a great study, and we're going to get into some more detail on it.
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  But let's do talk about the top line.
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  So what does 3.5% mean?
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  There's a big range around that, isn't there?
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  There is.
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  3.5% means it's pretty stable.
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  It's been 3.5% for a couple years right now.
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  So if you look at 3.5% you might say, "Okay, what does that really mean?"
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  It's pretty consistent.
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  And I think you have to say there's got to be some cost
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  discipline across the organization.
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  But 3.5% doesn't mean that things are static.
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  I think it means that it's a time for differentiation, too,
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  and that's the difference there.
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  It doesn't mean that everything is the same.
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  An interesting point here is that the range in the study to whatever 95th
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  percent confidence level is three to four.
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  So it means that there is some differentiation across different
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  function skill sets people, right?
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  So it's not just everybody peanut butters it at one number.
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  Absolutely.
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  There is a range and also typically when you look at that 3.5%, the
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  merit is actually projected at 3.1%.
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  And then there's this other category, which is about half a percent.
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  But you're right, the average is 3 - 4%.
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  So there is differentiation and it is not a 3% or 4% increase for everybody.
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  In fact, you're going to see a lot of people are going to be
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  thinking very carefully about how do I actually spend those 3-4% of
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  dollars on my employees this year.
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  Yeah.
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  You talk in the study about skill set recognition too, and
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  one of the hottest topics is AI.
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  And we'll talk more about it, but there seems to be some degree of added
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  reward for people who are adept at AI.
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  They're really important skills in a company right now.
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  There is added reward for people with AI skills.
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  And in fact, in our research there was a whole section where we asked
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  specifically where is there a premium paid for additional skills?
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  Where would you pay for additional skill sets?
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  And there's a compensation premium paid for AI skills at 37.8%,
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  and that's what people cited.
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  But I think you shouldn't look at that and say, "Okay, that's exactly
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  what we're going to pay for AI only," because right behind that is
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  a premium paid for leadership skill sets and management skill sets at
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  30.7%, and beyond that, data science.
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  So there are a number of different skill sets that actually count equally
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  or almost equally as AI skill sets.
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  So skill sets are very important, but it's not just AI skill sets that count now.
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  And you're talking in the aggregate anyway.
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  It's different by company, but AI technical skills are rising to the
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  top, which isn't surprising since those are the huge growth areas.
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  Yeah, and I think what companies need to do is they really need to step back as
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  they're looking at their organizations, business leaders need to step back.
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  They need to say, "What is my business strategy?
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  Which capabilities are going to drive growth?
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  Which are going to drive productivity, customer value, innovation, transformation
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  over the next three years, five years?
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  Which individuals are going to bring that, and how am I going
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  to reward those individuals?"
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  So that's really what we're looking at, and if there's skill sets associated
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  with that, yes, reward those skill sets.
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  But it's not particularly AI skill sets.
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  It's do I have AI skill sets that are actually delivering value?
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  It's not the AI skill sets in particular, it's what they're
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  delivering, and that's what we really need to think about rewarding.
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  And it, again, it depends on what industry.
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  If you're in the AI industry, you're rewarding technical skills.
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  Some of these comp packages for those folks are just out of this world.
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  If you're in manufacturing, it could be people who are adept at deploying
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  AI and robotics and so on and so forth.
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  It's a different flavor depending on where you sit.
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  Exactly.
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  As a business leader, you have to keep coming back to where am I
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  delivering value, and who are the people that are delivering value?
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  And you need to reward people that are delivering value to the business, and
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  that's what it really comes down to.
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  Now, one of the key challenges that I think most companies
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  are facing is how do you grow?
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  And we're in a higher inflation-- 3.5% inflation-- era, while at the
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  same time it's almost no growth or sub 1% growth for most people,
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  that aren't in the AI industry.
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  Correct.
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  It's a huge challenge to make that equation work when you're
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  growing your costs and you're not growing your top line.
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  How are HR professionals dealing with that?
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  You mean the inflation versus you have a 3.5% budget?
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  As an HR individual, you really do have to acknowledge that your
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  employees are dealing with inflation.
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  You have to acknowledge that they have that lived experience certainly.
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  Their costs are rising.
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  At the same time you're right, the cost of labor is going up, and that
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  really is the cost of labor, the cost of goods, everything has to be anchored
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  to that from a business perspective.
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  So you really have to just as a business person, you really have to
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  anchor yourself to those expenses.
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  Yeah, and you've been a huge advocate of CHROs and human capital professionals
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  wearing the business hat and partnering with their finance for finance groups.
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  Because you can't do this in a vacuum.
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  So everybody wants to reward your people.
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  You want to match inflation because that's what they're facing.
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  But at the same time, you've got other constituents here, namely
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  your owners or shareholders.
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  You've got to produce the results.
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  So it's a delicate balancing act.
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  It is a balancing act, and I think you just have to remind yourself that, you
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  know, employees experience inflation personally, and we acknowledge that.
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  But companies have to price labor competitively.
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  And this is what we're doing.
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  We're going out and we're saying, "How do companies experience labor competitively?"
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  That's what this research report really does.
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  It anchors it to the competitive environment.
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  And I will also remind everybody that when you say this range is
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  3.5% on average, 3-4%, the merit increase is really about merit.
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  It's not about a CPI.
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  It is not a cost of living increase.
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  It is about merit.
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  And organizations really need to think about the merit portion of this,
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  3.1% on average, as a merit increase.
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  And it should be distributed from a merit perspective rewarding performance.
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  And then that other category should be distributed to deal
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  with things like promotions.
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  Equity.
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  Equity, other, you know-
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  Yeah.
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  You know, all the…
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  Other adjustments
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  … Need for skills and other things like that.
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  Sure.
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  So it is not cost of living.
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  It's a sad reality, but it's the reality.
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  As a business, you have to deal with the competitive environment.
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  You also pay for promotions, and you want to make sure that-
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  You have to because you have to.
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  You exist in a competitive environment.
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  And you have to think about, how do I retain and engage and acquire the
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  kind of talent that I need to be competitive in this current environment?
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  Which also means that maybe the balancing act is you do need to
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  take action or act differently for those people who are not performing.
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  It's not just a numbers game, but it's a productivity gain.
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  And make sure the organization is as effective as it needs to be.
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  Exactly.
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  Because that is going to be the best for the business going forward and
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  also for your employees who are in the business and are productive and are
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  delivering what they need to deliver, and that's going to be the healthiest
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  for your business going forward.
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  Now, another thing organizations can do and have done in the
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  past is to take head count out.
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  Let's just address it straight on.
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  But we're sitting here at nearly full employment.
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  I don't know if people remember this, but the number that we used
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  to use economically was that 5% was full employment, you could
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  never get better than that.
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  And here we are today near 4%.
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  It means that the labor market is tight despite the inflationary environment, so
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  you want to be careful to retain talent.
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  This is a COVID learning, right?
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  We got rid of a lot of talent, and then we had to go recruit
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  it back at higher prices.
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  And that's fresh in our memory.
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  So that's the other flip side of it.
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  It is.
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  What's really interesting though, we discovered in this report that the
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  findings said that only 31% expect headcount growth and 9% expect reductions.
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  But if you look at that top line, what it really misses is the movement underneath,
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  because companies are restructuring.
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  They're automating, they're upskilling, they're talking about selectively
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  hiring for critical skills, they're talking about reducing work in
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  other areas at the same time.
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  What we're seeing is that even though things may look static and the workforce
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  may look like it's not getting bigger or smaller, it is becoming very different.
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  And so I think there's a lot of movement underneath the surface
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  that may be missed, which is making this a very interesting story.
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  So to your point, you have to be very careful about rewarding the people who
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  are developing the skill sets or have the skill sets that are really adding
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  the value that you need as you make these changes underneath the surface in your
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  workforce that we're seeing and that are indicated by some of the other findings
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  in this particular research report.
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  So yeah, on the surface, it looks really like there's not a lot happening.
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  It looks pretty calm, pretty static.
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  But then you start to dig into some of these numbers and you say, "Wow, there
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  is a little bit of undercurrent that when you dig into it, there's a lot
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  more happening here than meets the eye."
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  A lot of stuff going on.
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  For a while you couldn't pick up a newspaper without reading
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  that AI was going to kill jobs.
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  Everybody was afraid that they were going to be gone.
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  In fact, that isn't happening.
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  There are some AI job displacements but there are a lot of AI job gains.
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  So this underscores your point that even within the narrow slice
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  of the AI subject world, it looks steady, there's dynamic change.
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  Exactly.
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  An organization could start the year and end the year with basically
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  the same headcount, but they could have materially a very different
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  mix of work within their organization, different roles and different
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  capabilities that they need within that organization, which to your point,
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  could be driven by how they're using technology, potentially even AI, to change
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  workflows, to change how work gets done, which in essence is really exciting.
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  I think the message to employees and to managers is as you leverage
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  these technologies as an employee, it should serve you very well
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  if you begin to get fluent with some of these new technologies.
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  Take advantage of what your employer is offering you.
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  Upskill yourself, reskill yourself.
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  Be open to this, because it will open up opportunities for you.
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  Yeah, and it's interesting that you get to the concept of change, and the majority
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  of people will say, "I love change."
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  It's not true.
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  They don't.
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  They do as long as it's somebody else that has to suffer it.
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  Because it's hard.
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  It's stressful.
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  Change is stressful particularly when there's unknown, changes
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  that could impact somebody.
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  But, you and I were there in the era when PCs were dropped into the
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  workplace for the very first time.
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  Before that, it was 100% manual.
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  I was?
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  I was.
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  I don't know about you.
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  Are you revealing my age?
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  I didn't do that, no.
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  But it reminds me of that era when everybody was afraid, "What's going
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  to happen?" And you remember you got these little beige boxes and..
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  I remember when email was, became a thing.
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  Yeah, and
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  We were all like, "What is this email thing?"
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  And you're always afraid of what the latest and greatest either
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  digital evolution or workplace evolution will do to your jobs.
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  But in fact, it has made workforces, people more productive.
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  Just think about automation of assembly lines.
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  People used to sit there and screw in a taillight all day every day, and in
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  fact it's all automated now, freeing people up to do higher order work.
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  So at a certain level, you understand the fear but we all need
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  to kind of take a deep breath on these things and get through it.
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  But it does, it puts some pressure on the human capital organization
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  to help marshal all this.
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  It does.
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  It gives the human capital organization a huge opportunity.
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  But they too need to see it as an opportunity, and they too need to upskill
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  and reskill themselves to be able to drive that change through the organization.
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  I think CHROs have a huge opportunity to really step in and help drive that
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  change through the organizations.
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  And if they partner with CFOs and the CEO, they can really be a very powerful
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  force to help the organization really rethink their whole ways of working.
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  When people talk about the future of work and the opportunity to really
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  change their whole operating model, the way they actually structure themselves,
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  the process of working, the ways of working, CHROs can play a fundamentally
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  enormous role in helping the organization through that and helping them in the
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  managing that change in the organization.
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  The final thing I would say around that is the leadership required to push that
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  kind of change through the organization is huge, and thinking through the kind
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  of leadership that you need and how to develop that kind of leadership, recognize
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  it, and then develop it is huge, which is probably why you see the skill sets that
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  are valued and being rewarded through this, in this compensation report.
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  Yes, 37% goes to AI, but that 30% going to leadership and management skills, that's
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  a recognition that is just as important, and you need to reward those skills,
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  Because those are going to be equally as important as all this change and
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  disruption happens within organizations.
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  And speaking of leadership, one of the things you and I have
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  learned over and over again in our careers is that the communication
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  piece of this is so important.
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  The natural tendency is to keep all this quiet, confidential,
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  don't explain anything, whether you're talking compensation, merit
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  increases, whatever the number is, because, it's a kind of a secret.
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  It's tense.
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  But in fact, these are adults.
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  People understand if you can explain to them the reality.
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  So if you're in a situation where your business isn't doing well
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  and you can't hit the average, or whatever your situation is.
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  You've said over and over again, it's better off just explain it, share with
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  your people what's going on, lay it all out for them, and there will be better
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  acceptance and enrollment in the concept.
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  You are absolutely correct.
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  That is always the case.
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  Authenticity, transparency wins every time.
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  Every leader that approaches a situation like that with authenticity
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  and transparency earns the trust and respect of their employees.
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  And trust is fundamental in any situation, especially situations
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  that are difficult ones.
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  And if you can earn the trust of your employees, then they will then feel
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  the-- I would call it-- the psychological safety to then really believe you.
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  If they feel you're authentic and they can trust you, then they will believe
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  what you say the next time and the next time, and that goes a long way then.
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  Yeah.
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  People probably listening to this going, "What does this have to
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  do with salary increase budgets?" These are emotional kinds of
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  subjects that need some explanation.
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  I think what we're saying is that the leadership needs to start, obviously
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  in the C-Suite, the CHRO, the CFO, but it needs to be cascaded down
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  so that managers can communicate the reasons why, share with their
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  people, and gain acceptance of this.
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  You don't just lay it on them.
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  You have to work it and build that confidence.
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  I think rewards have everything to do with communication and frankly, emotions
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  and honesty and trust, and you have to be absolutely transparent about that as well.
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  And people get very emotional about their compensation, and if you
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  can put the rewards in context and help people understand how it is
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  connected to their performance and that they are really being rewarded,
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  that this is a reward for what their contribution is, and you can demonstrate
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  that and they see that is really happening within their organization.
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  It has to be authentic, though.
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  They have to see that happening within their organization.
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  Then they will see that's connected to the business and their contribution.
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  This is an important point, also on total rewards.
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  So it's not just about salary increase budgets.
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  It's not just about the merit.
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  It's not, as you've said, it's not just what's happening in the external
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  economy and inflation and all that.
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  You've got to put all of this in the context of total rewards.
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  So there's an opportunity here as part of this communication
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  to present the whole package.
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  Okay, this is one slice, which is your base salary, but look
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  at all these other pieces.
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  And the total rewards package is usually 30-35% higher than base and bonus.
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  So you've got all of this going on and should be communicated in context.
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  Exactly.
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  And frankly, nowadays, total rewards should be all-encompassing because many
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  employees, they look to compensation, especially base pay, as sort of the
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  table stakes, and they're looking for a lot more from their organizations.
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  They may look to development as part of their total rewards.
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  Do I have opportunity within this organization?
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  Am I going to be mentored and developed?
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  Do I have a career path here?
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  To them, that's part of total rewards.
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  Things like even flexibility, that's a total reward to them.
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  Sometimes they value that more than certain other things.
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  Their total benefits, 401, that's part of total rewards.
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  So as managers think about communicating that, they have to
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  think about the total package.
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  One of the things that came out in your study is that roughly two-thirds
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  of the organizations just rely on salary-based or job-based salary ranges.
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  And this goes back to the old Hay points or the bands and so forth.
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  But as you look at this today, how should companies be thinking about
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  modernizing their pay structures?
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  Because again, it's not just about what the budget is, it's
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  about the whole construct.
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  Yeah, I think you can't abandon job-based pay because I think jobs
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  still provide that architecture right now for the benchmarking and
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  the governance and the equity, so we can't just walk away from it.
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  Job descriptions definitely need to be updated right now so that they
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  reflect some of the current work.
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  You have to begin to layer in some of the new skills, and that will be happening,
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  especially those skills that really are adding value, that are really contributing
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  to productivity or the skills that are particularly scarce that you need,
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  that you value and you're looking for.
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  And maybe create new roles where those skills are at a premium.
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  You might begin to create sort of hybrid roles, but I think you're still going to
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  have a structure where in practice it's going to end up still being jobs, but it's
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  going to be jobs plus skills supported by, you know, some kind of clear governance.
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  I think you're still going to end up having basically job-based structures.
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  Earlier you were talking about the various pools.
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  You've got salary adjustments, but you were talking about
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  other adjustments, so there's promotions, equity, critical skills.
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  Let's call that a strategic adjustment pool.
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  How do you recommend people put a strategic adjustment pool together
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  and govern that and implement that?
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  It sounds like a small pool when you think about merit being 3.1 out of the three
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  and a half, and maybe a half a percent.
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  I think we call it, 0.5% to 0.7% might be the other on average.
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  But in actuality, it actually can be quite substantial
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  depending on your organization.
• 23:08
  So most of it really needs to be thought of as a promotion pool because you really,
• 23:13
  as you said earlier, you really need to think about who are the folks in your
• 23:17
  organization that need to be promoted.
• 23:20
  You do need to put governance in place so that it doesn't become who has the
• 23:24
  manager who has the loudest voice.
• 23:26
  So you do need…
• 23:27
  There needs to be a fair process
• 23:28
  … There needs to be a fair process in place to think through that promotion process.
• 23:33
  Each organization has to figure out what that looks like depending on what
• 23:37
  their management structure looks like.
• 23:40
  Because you don't want it to be just, "Hey, I get to promote my
• 23:43
  friends because I'm whatever by fiat because I like this person."
• 23:48
  Or you shout the loudest, yeah.
• 23:49
  You shout the loudest.
• 23:50
  Yeah.
• 23:50
  That's gotta be different than that.
• 23:52
  Final area that you talked about with executive salaries, that's
• 23:56
  a whole different conversation.
• 23:57
  But in this case, it's governed by the board of directors
• 24:00
  through the compensation or talent committees directly.
• 24:03
  And bigger part of executive compensation is variable pay, and
• 24:07
  lower portion is the fixed pay.
• 24:09
  A lot of boards are, in fact, not giving merit increases or annual adjustments
• 24:13
  to base salary because they're relying more on the variable comp.
• 24:18
  Just talk about now in this brave new world that we're in, how should
• 24:22
  boards be thinking about all that?
• 24:24
  If you look at annual and, in particular, long-term incentives, which are
• 24:29
  really where most of the executives' compensation is focused-- AIP, when we
• 24:35
  looked at the study executives, typically the target was at 40%, CEOs was at
• 24:40
  100%, sometimes that's a lot higher.
• 24:44
  We don't see a lot of change in terms of how boards are looking to
• 24:49
  compensate or the metrics that they're looking by which they compensate.
• 24:53
  They're typically still very financially focused.
• 24:57
  If you think about where they're focused on, I think it's 67% are
• 25:04
  saying their financial metrics.
• 25:06
  And I think the financial foundation is probably not going to change.
• 25:10
  I don't think that we want to see anybody rewarding things like the use of AI, or
• 25:17
  I think you do not want to reward things like pilot volume or adoption alone.
• 25:21
  I think you need to define measurable value first.
• 25:24
  If boards need to think about how they apply AI-enabled productivity
• 25:29
  and workforce transformation, they need to really connect the AI, the
• 25:33
  executives' incentives, to actual output.
• 25:37
  But I think 79% said they use financial measures for executive AIP, and I
• 25:42
  think that's compared with 29% using operational measures and 23% using
• 25:47
  strategic or non-financial goals.
• 25:49
  I don't see that changing a lot.
• 25:51
  Yeah.
• 25:51
  But the point here is it needs to be a little bit more strategic, and it needs
• 25:54
  to be more long term and more variable.
• 25:56
  And I think your point is that's not changing anytime soon.
• 25:59
  No.
• 26:00
  If you can reward the value created by transformation and think about
• 26:05
  what are those values, what would the transformation represent, how do you
• 26:09
  measure that transformation, as opposed to just activities that were about
• 26:14
  transformation, then those are the metrics that I think the board should focus on.
• 26:19
  It shouldn't be about the fact that the transformation activity occurred.
• 26:24
  Your new report is called the US Salary Increase Budgets, and it's again, at
• 26:29
  tcb.org under the Human Capital Center.
• 26:32
  Diana Scott, leader of the US Human Capital Center, thanks
• 26:36
  for being with us today.