The CFO'S Perspective

What will Manufacturing Pay Increases Look like in 2023?

A hand turning up a wage dial from minimum to medium to maximumAccording to CFO Dive, next year US employers are planning the highest pay raises in 15 years. Overwhelmingly, the executives surveyed cited a tight labor market as their main driver, with 73% indicating that they would be increasing wages to attract and retain their labor force. However, with national wages expected to rise by an average of 4.1%, these pay raises still would not offset the recent drop in real earnings due to rising inflation.

While the national average for wage increases is expected to be around 4% next year, manufacturing is one vertical where pay increases have historically lagged behind the rest of the market’s growth due to stringent control over wages by management and pushback against rising wage trends. So, how much will manufacturers increase wages next year?

Obviously, it is anyone’s guess what the market will do exactly (and even if other industries increase their wages, there is no guarantee that manufacturers will follow at the same rate), but here is what we expect to see in 2023:

Combatting High Inflation with Wage Increases

Inflation is currently around 9%, the highest it has been since 1981. This has executives worried. In fact, recent data reveals that CFOs are overwhelmingly more concerned about high inflation (73%) than a looming recession (27%).

While both can hurt business, executive leadership is more familiar with battling downturns than combating the effects of persistently high inflation. A Deloitte article titled How CFOs Can Rise to Meet the Challenge of Soaring Inflation explains pointedly, “The last time many sitting CFOs faced a soaring inflation rate similar to today’s would have been approximately, well, never.” This is a salient point because weathering snowballing inflation requires an entirely different strategic plan than weathering an economic recession. And while they may have less experience with ongoing inflation, senior management understands that encouraging employee retention is a key tactic to managing through inflationary challenges. In fact, this same article goes on to say, “High labor turnover is often associated with high inflation, and keeping top talent was hard even before inflation hit 9%. As workers seek wages that keep pace with inflation, talent-retention efforts become even more crucial.”

As a result, many CFOs are planning to increase wages, at least to some degree, to help hold onto top talent. Regardless of what those raises end up looking like, it is a good bet to assume that there will likely be raises across the board in the coming year as high inflation puts pressure on employers to offer more to attract new hires and retain current employees in this tight hiring market.

However, for manufacturers these increases may be smaller than other verticals. According to Ethan Karp rising wages in manufacturing are the elephant in the room because manufacturers often strongly resist increasing wages. However, wage increases are proven to work because they:

  • Are more cost effective than hiring and training new staff
  • Result in greater productivity
  • Eliminate the opportunity cost of allowing resources to sit idle
  • Attract more skilled workers
  • Increase employee morale and loyalty

He uses the following example to illustrate some of these key these points:

“Let’s say you pay workers $13 per hour at your factory. You figure that bumping them to $16 will cost you an additional $7,000 per year, per employee. But your average tenure for entry-level hires is four months. So three times a year you have to reinvest in posting the job, interviewing candidates, and onboarding and training new hires; that costs $4,000, including HR and training time, for each new job. Even worse, it hinders your productivity. The time between losing one person and hiring someone new might cost you $10,000 in lost productivity. More likely, you pay your remaining team an additional $3,000 in overtime to maintain production. Even then, replacing that one worker costs you around $15,000 – more than double the cost of paying them more, which would reduce turnover. There’s also an opportunity cost when factory jobs go unfilled. Equipment and space you paid for sit idle; sales leads are ignored because you won’t be able to fulfill the orders if you get them. These costs are harder to calculate, but they’re very real.”

And while Karp recognizes that on average manufacturing workers earn a wage premium over other types of labor, he also points out that this premium “has shrunk by about a quarter since the ‘80s, thanks to the rise in temporary workers, foreign competition, the decline of unions and other factors.” It is this wage gap in manufacturing that leadership will need to make up in the midst current and predicted economic turmoil to address ongoing hiring constraints.

Rethinking Compensation Packages

According to the US Labor Department, the quit rate was at a record-high 3% at the end of 2021 as employees left their jobs in search of more flexibility and better pay. No industry was spared as these employment shifts rippled through the labor pool. With manufacturing turnover at an even higher 4% during this time, many manufacturing operations slowed to a crawl. Manufacturers were forced to find workers wherever they could, including enlisting their executives to take shifts on the factory floor in some extreme cases.

Exacerbating matters, over the summer this year the number of available jobs was approximately twice the number of job seekers, putting US employers in a precarious position. The pressure to hold onto workers to avoid needing to go back to the shrinking labor pool became of paramount importance. As a result, US employers began getting more creative with compensation by offering:

  • Sign-on bonuses
  • Greater work schedule flexibility
  • Non-compensation rewards
  • More frequent salary increases
  • Retention incentives

In manufacturing these types of tactics have become even more important in recruiting workers because the percentage of the US workforce in manufacturing has fallen to less than 9% over the last two decades. By rethinking compensation manufacturers are hopeful that they may be able to make traction among their dwindling labor pool. And according to Time magazine, manufacturers are already beginning to see these approaches working, leading to average salary increases of 6% for existing workers and average salary increases of 6.8% for new hires.

Automating Roles Where Possible

Manufacturers must remember that while salary increases can surely be used to incentivize employee retention, they may have other options as well. As Jim Tyson explains when discussing pay raise speculations for 2023, “CFOs also need to ask ‘are there particular areas of the company where the answer is not staffing, but the answer is leaning more into technology and efficiency?’.”

For some types of roles automation may be utilized to carry out the same functions without the need for ongoing pay raises. In areas where technology can replace human involvement, manufacturers must weigh the upfront costs of implementing these types of solutions with the long term carrying cost of employing people to do the same jobs, when those employees’ wages may very well continue to increase significantly over the next several years.

If you need strong financial leadership to guide your manufacturing operation, please reach out to us! We have a team of highly skilled consulting CFOs with manufacturing experience ready to assist with your budgeting, forecasting, and strategic planning initiatives for the coming year!

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Topics: Manufacturing

Topics: Manufacturing