Average Pay Raise Percentage: Is 5 Percent Still Acceptable?

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Naturally, the average wage has increased significantly in the United States over the past few decades. As the cost of living increases, it makes sense for wages to go up.

Data from the Social Security Administration (SSA) shows that the average wage has almost doubled from 2000 to 2022, increasing from $32,154.82 to $63,795.13.

However, the average wage increase has fluctuated quite a bit over that period. For example, the average wage increased by just 1% from 2001 to 2002, while 2020 to 2021 saw an average increase of 8.89%.

Still, since 2000, the average raise sits at 3.43%, with most years after 2000 hovering somewhere between 2% and 4%. In fact, 2021 was the first year in two decades that the average raise went above 5%.

For many workers, 5% is considered the bare minimum raise they deserve, especially considering quickly rising inflation affecting everything from mortgage interest rates to the cost of food.

According to the Bureau of Labor Statistics’ (BLS) Consumer Price Index, the average consumer paid 3.7% more, on average, for items like food, energy, and clothing. A 5% raise just barely covers those extra expenses, which doesn’t leave much room for a primary reason raises exist: to reward workers for exceptional performance.

On the other hand, a 5% raise for employees means a larger financial commitment from employers. Balancing fairness with financial stability is a top priority for companies determining an acceptable pay raise.

But Is the Average Pay Raise Percentage Going Up?

Based on the SSA’s data for 2021 and 2022, it’s possible that we start seeing bigger pay raises.

We might assume that the jump of over 8% in 2021 could be making up for the pandemic-related financial strain placed on many companies in 2020, consequently reducing pay raises. However, the fact that 2022’s average wage increase remained over 5% is a good sign that pay raise percentages might be on an upward trajectory.

BLS data showing wage increases in each state between March 2022 and March 2023 also lends to this idea. Several states, including Florida, North Dakota, and West Virginia, had average pay increases of over 9% during this period. Idaho topped the list with a 10.1% average increase.

Even states on the lower end of the pay raise scale, like California, Illinois, and Indiana, saw average increases of between 4.8% and 6.2%. The only outlier was New York, with a 2.1% average pay increase.

These numbers are promising, but in full transparency, these numbers don’t tell the full story.

Pay raises vary significantly from state to state and even city to city within a state. They also vary among industries, companies, and roles. Businesses also base their pay raises on performance, skill increases, and numerous other factors.

But this data provides relatively solid proof that, on average, workers are getting better raises during the 2020s than they had been in preceding years. With only two states—Delaware and New York—having average pay increases of less than 5%, it’s clear that expectations of fair pay raises could be shifting.

And that makes sense, considering the higher costs of living people across the nation, regardless of the state they live in, are facing.

World Population Review highlights nearly half of the country as having higher costs of living than the national average. As of June 2023, Washington, D.C., and 17 states pay at least 5% more for food, housing, utilities, and other necessities than residents of other states. That’s over one-third of the states.

When considering this data, it’s easy to see why a 5% pay raise is no longer a feasible amount. For many, that 5% just barely covers their additional inflation-related costs. For others, it doesn’t even begin to cover extra expenses.

What Is An Acceptable Pay Raise These Days?

As I said, national averages and state averages don’t paint a full picture of the pay raise climate across the board because raises vary between industries, companies, departments, etc.

So, the data I outlined above isn’t meant to alarm you or trigger you to change what you’re doing. But it does provide some insight into what you might expect for the coming years regarding average pay raises.

The federal government released a statement in August detailing a 5.2% pay raise in 2024 for federal workers, the highest pay raise they’ve seen in decades. Data from consulting firm Mercer found that the average salary will increase by 3.9% in 2024. And Apple says its average pay raise for 2023 sits at about 4%.

The data shows that the average worker will likely get a raise in the ballpark of 3% to 6% for 2023 and 2024.

However, the data also considers pay raises for all employees in one organization, from top-level executives to entry-level workers. There’s usually a significant range between pay raises in these groups.

And that’s a good thing. It can be risky to offer large raises for all employees at an organization. When it happens once, workers will expect it to continue year after year—not a very sustainable business model.

Instead, it’s important to base raises on performance, reliability, skills, and other metrics you use to gauge the raise someone deserves.

Someone doing the bare minimum based on performance evaluations probably shouldn’t get the same raise as their colleague, who volunteers for extra shifts, has earned two certifications this past year, and attends all required meetings without fail.

What’s important is setting a standard at your company for raise expectations. Some organizations find success with pay raise ranges or tiers, similar to how they’d set up pay ranges for similar roles.

Using this model, you could set a minimum and maximum pay raise percentage for each role or group of similar roles, like 3% to 6%. Then, base each employee’s raise within that range on the factors your company values for raises.

This strategy gives everyone something to work toward and sets clear guidelines for raise expectations rather than leaving them guessing year after year.

What If Employees Are Worried About Inflation?

Inflation shouldn’t be the only factor you consider when deciding how much to raise someone’s pay, but it definitely needs to be part of the conversation.

Workers are understandably worried about inflation and how it impacts their wages now and in the future. Cost of living is higher, and employees want their pay raises to help cover these additional costs. This is a valid concern that companies should be open to addressing.

Compensation discussions can help workers understand their pay raises while answering their questions, but companies should handle these conversations delicately.

Most importantly, there needs to be an honest explanation ready for employees about their pay raises. What objective metrics led to HR’s decision? Have clear data ready to explain it, especially if the raise didn’t meet the employee’s expectations.

Make it clear that these are the metrics the company uses to determine raises and that inflation is just one part of the entire picture.

Also, remain a united front with HR. Even if you disagree with an HR decision about a raise based on your subjective data, it’s best to leave personal opinions out of the conversation. Instead, focus on the raw, objective data.

Finally, try your best to avoid discussing personal topics. Employees might try to work their financial challenges into the conversation, but joining in can blur personal and professional lines. Bottom line: personal issues should not affect pay, so they don’t belong in a compensation discussion.

Now, if several employees mention that they don’t believe their pay raise takes inflation into account enough, that’s a problem. But, budgeting concerns can make it difficult for businesses to offer higher raises.

In that case, consider getting creative with compensation. Non-monetary compensation can reward employees without straining the budget as much as direct compensation.

For example, offering personal or mental health days might be even more valuable to some workers than a pay raise. Or allow more flexibility with remote and hybrid work.

You could also give paid time off for volunteering, schedule a company retreat, or set up a gainsharing plan.

With inflation and economic uncertainty, employees want to feel appreciated and secure in their jobs so they can feel better about their financial future. Pay raises that consider current inflation are a good start, but they’re not the only option.

If you absolutely can’t go big with raises this year, think outside the box to give your workers benefits that mean something to them while offsetting some of the financial strain businesses also worry about.

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