Pay rises to average 4.2% in Europe next year – report

While slightly lower than this year, budgets for pay next year show how companies are focused on winning top talent

This year, HR and compensation professionals are again faced with a challenging economy when it comes to determining pay increase strategy.

Although in many respects the same economic pressures are being felt across the globe, some nations have been worse affected, especially in Europe. Even during this turbulent time, there is strong wage growth in 2023 and a steady commitment to continuing that growth for 2024.

Research from Payscale indicates that despite economic uncertainty, in 2024 the average pay increases in Europe are expected to be 4.2%, slightly higher than the average of 3.8% reported in the US. When looking at the expected increases for 2024 and those of the last few years, it seems possible that the 3% increase may have become a thing of the past.

The fact that wage growth is not stagnating — despite economic issues — suggests that other factors are at play when employers in Europe are deciding their labour budgets.

Labour budget growth

Planned salary budget increases for 2024 are an average of 5.9% in European countries, with the highest in Poland (6.1%), according to Payscale’s 2023-2024 Salary Budget Survey: Europe Edition.

Increases planned for 2024 in Europe (combined) were slightly lower than 2023 increases for all employee groups, apart from exempt (non-management) employees, whose 2024 planned increases were 0.5% higher than actual increases in 2023.

The strategy for salary budget increases in Europe sends a clear message that despite recession and inflation conditions throughout the continent, compensation professionals are focused on winning top talent.

Prioritising workforce retention

In situations where inflation is high, strong pay growth estimates are often expected. Employers know that employees hope to have the decline in the value of their salaries offset by higher compensation packages.

“Labour is likely to remain unusually scarce, especially in the core euro area countries, also for demographic reasons, unless there is a deep recession,” according to Commerzbank economist Joerg Kraemer. “The bargaining position for unions and employees should remain strong.”

When faced with hard-to-fill vacancies, employers also seem to be prioritising workforce retention and engagement, opting to ramp up pay budgets for the most vital and highly skilled employees while cutting costs in other areas.

The projected increases also indicate that compensation professionals may be taking a more long-term view of their budgets, with the knowledge that recessions typically last no more than a year.

Meeting legislative requirements

The EU Pay Transparency Directive is also likely to be having an impact on organisations’ salary budgets. The new requirements mark a significant change for most organisations and salary budget season provides the perfect opportunity to make internal pay equity adjustments.

When we surveyed organisations at the end of 2022, 15% of those in Europe said that preparations for pay transparency would be a factor in their base pay increases in 2023. Most (56%) also said that recent pay transparency legislation has driven them to change or improve their compensation practices.

Indeed, before sharing pay ranges with employees and job candidates, it is important to first be certain that employees are being paid fairly to market. It’s also imperative to confirm there are no significant pay gaps between employees with the same jobs or doing similar work.

Optimising salary data

Compensation and HR professionals play a pivotal role in ensuring that an organisation’s salary budget strategy aligns with business goals, industry standards, and employee expectations. Before walking into the next salary budget review, compensation professionals can use the salary budget data available to:

Demonstrate adaptability and agility in salary budget strategies
Embrace innovative approaches to maximise the impact of total rewards
Build compensation programs that enhance employee engagement.

Recent years have been more difficult than most in determining if and how salary budgets will change due to highly dynamic contributing factors. As well as salary budget reports, organisations need to watch wage growth trends and continue to invest in up-to-date market data to ensure pay is fair while remaining competitive.

As leaders, it’s important to capitalise on the insights available to elevate the impact of compensation. Understanding the external factors affecting pay decisions is key to ensuring compensation investments deliver competitive pay programmes.

This is a time when compensation and HR professionals can provide an informed recommendation about salary budgets, based on what they’re seeing in the market as well as on the realities of their organisation.

For insights on projected salary budgets from compensation professionals serving organisations in Europe, click here to download Payscale’s 2023-2024 Salary Budget Survey: Europe Edition.