US salaries are going up, but compensation budgets for next year and salary projections are expected to lag inflation, according to the “2023 US Compensation Planning Survey” released by Mercer.

Employers are budgeting an average of 3.8% for merit increases — compared to the 3.4% actually delivered this year — and 4.2% for their total budget increase for 2023.

Mercer noted that total base salary increase budget also includes other base pay increases, such as promotions and cost-of-living adjustments, in addition to merit increases.

The labor shortage was reported as the top driver for increases in compensation budgets for employers, and Mercer said this aligns with long-standing practices focused on paying based on demand for labor, not inflation or cost of living. However, the disconnect in compensation budgets and rising inflation appears to be creating frustration with workers, who have seen all of their wage gains eroded by rising costs. This will continue to drive dissatisfaction with compensation programs and pressure employers to increase wages in the months ahead, according to Mercer.

The study also found employers’ primary response to inflation is providing ad-hoc, off-cycle wage reviews and/or adjustments (reported by 38% of employers).

In addition, Mercer reported only 10% of US organizations say recessionary concerns are currently having a high impact on their budgets for salary increases. Still, should the economic situation continue to decline, that may change. The survey found no employers currently plan to freeze pay in 2023.

Another finding: Employers have been slow to modify their communication of pay ranges outside of state mandates. More than half of organizations, 53%, said they will comply with local laws and have no plans to broaden transparency beyond what is required. As it stands today, 44% of organizations do not communicate any information regarding an employee’s current compensation grade or band, and only 21% of employers make available compensation bands for all jobs outside the employee’s current role.

The survey includes data from more than 1,200 companies in the US across 15 industries.