2024 HR Budget Outlook: Fewer Increases Will Harm Employee Experience

Author: Laci Loew

October 3, 2023

This year, fewer HR leaders than last are planning to increase their 2024 HR budgets even as organizations remain concerned about enhancing the employee experience, effectively addressing skill development needs, and reducing ongoing talent retention challenges.

The HR & Compliance Center 2024 HR Budget Pulse Survey analyzed data from 107 participating employers in the US during July 2023. With inflation decreasing and labor markets beginning to loosen, the percentage of organizations expecting to increase their HR budgets for next year has decreased from 49% in 2022 to 35% this year. See Figure 1.

Figure 1. Percent of Organizations Planning for HR Budget Increase

While HR leaders are looking to budget for less spend in 2024, it remains an employees' labor market, and the workforce continues to bring elevated expectations for skills development and salaries. For employers, with turnover rates soaring (which means lower workforce morale, loss of employee productivity, and missed business targets), Gallagher's August 2023 research shows retention of key talent remains the top business priority - even more so than revenue and sales growth.

In XpertHR's Company Culture 2023 Survey Report, findings were similar. That is, the largest portion of respondents (29%) ranked loss of key talent as the most concerning problem - a concern more pressing than revenue loss (25%). So, organizations will need to carefully consider 2024 HR budget plans and prudently balance anticipated reduced spend and its impact on increased turnover and degraded employee experience.

Where HR Leaders Plan to Invest in 2024

For those organizations with budget increases lined up for next year, HR leaders plan to invest most heavily in employee growth/skills development, compensation and benefits, and talent acquisition - all areas that can enhance the overall employee experience. See Figure 2.

Figure 2. Percent of Respondents That Ranked Each Talent Area Within the Top Three Organizational Priorities for 2024

Employee Growth and Skills Development Leads

Within the world of people, it is well-understood that hiring and training a new employee is far more costly than retaining top talent. With retention comes upskilling and reskilling focus - strategies that align very well with employees' wants and needs. As workers and workplaces adapt to automation and AI, the World Economic Forum's 2023 Study shows the top core skills required by workers today are analytical thinking, creative thinking, resiliency/agility, self-awareness, curiosity/lifelong learning, and technological literacy.

As traditional skills (e.g., mentoring, communicating, project management, etc.) are being disrupted and new cognitive and technology abilities are rising in importance, it is no surprise that companies see skills gaps as the main barrier to high-performance and plan to mitigate with targeted investment. Of those very few organizations (7%) who plan to allocate some portion of their 2024 HR Budget to adding positions to the HR staff, it makes sense that a "training specialist" is one of those roles.

Compensation and Benefits Rates Second

Employers appear to be betting big that an increased spend in compensation and benefits will elevate the employee experience. According to HR & Compliance Center's 2024 Salary Budget Survey, the average projected salary budget increase for 2024 is 3.8%.

And, as reported by Mercer's Survey on Health and Benefit Strategies for 2024, fielded in the first quarter of 2023, nearly two-thirds (a significant increase over one-fourth within the past two years) of large employers (those with 500 or more employees) say they are planning to make enhancements to their health and well-being offerings in 2024 despite continued and accelerated health benefit cost growth per employee (5.4% in 2023 up from 3% on average during the years prior and an even greater increase anticipated in 2024 and beyond). Given the focus on enhancing the employee experience and improving healthcare affordability for employees, most organizations do not plan to give their plan members more responsibility for the rising cost of health services through higher deductibles or copays.

Organizations' plans to increase compensation and benefits spend next year are not only related to pointed efforts to improve the employee experience, but also to effect change in the compensation philosophy. Many leaders understand the push toward a fairer future of work for all and intend to prioritize pay equity among all workers. However, if the US enters a recession later this year, then all bets are off for a 2024 anticipated employee compensation and benefits increase despite forecasted salary increases and more attractive benefit offerings.

Talent Acquisition Investment Lands in Third Place

Today, while layoffs are slowing, unemployment figures are improving, and skill gaps among candidates exist, great talent remains hard to find. As such, it is no surprise that almost a full one-third (29%) of surveyed organizations plan to invest in attracting and hiring top talent. A key talent acquisition (TA) strategy will be investing in acquiring new TA tools and optimizing TA technologies.

Specifically, expect to see HR leaders invest in sourcing solutions that leverage automation and AI to help identify potential candidates with hard-to-find (cognitive and digital) skills. Building talent pools and enabling processes to backfill candidates quicker than their hiring competition will put HR leaders in a front runner position to meet business goals and outperform their rivals. The most effective technology that can be deployed in the hunt for extraordinary talent requires focused attention in several areas:

• Implementation resources,
• Integration planning,
• HR and IT collaboration,
• Communication campaigns,
• Adoption strategies,
• Continuous improvement, and
• Upskilling HR, TA, and IT professionals in new AI capabilities.

TA tools and technology will level the candidate playing field and, at the same time, require tomorrow's recruiter to be ultra-sharp in managing AI-driven data outputs and masters in using emerging TA technologies - skill-development areas that require budgeted funds.

The Impact of Growing the HR Budget

As organizations review these findings and make decisions about if, how much, and in what people areas their 2024 HR budgets will change, it is hard to ignore the data that shows a strong relationship between leadership's choice to increase HR budget and employees' rating of a delightful or good employee experience (EX).

Among organizations that increased their HR budget in 2023 over that in 2022, 73% rated the employee experience today as delightful or good, according to the Pulse Survey. Among organizations that did not increase their HR budget from 2022 to 2023, however, just 60% rated their EX today as delightful or good - 13 points behind those organizations that increased their budget. This is true even though both groups were equally as likely to report a positive employee experience in 2022, prior to the HR budget increase. The data underscore that boosting the HR budget makes it more likely that organizations will effectively improve the employee experience. See Figure 3.

Figure 3. Positive Correlation Between Increase in HR Budget and "Delightful/Good" EX Rating

Additionally, organizations who increased the HR budget from 2022 to 2023 were less likely to report that their organization currently had a need for culture improvement (or had major cultural problems) impacting the employee experience. And finally, those organizations who increased their HR budget from 2022 to 2023 are more likely to be planning to increase the HR budget again in 2024, compared with those who did not.

What Choice Will You Make for Your 2024 HR Budget?

These data imply that HR leaders are aware of the measurable business impact of a strong investment in serving the needs of the employees. Still, costs always need to be managed, and prudent management calls for watching every dollar regardless of economic, labor, political, and social forces. Yet, high-performance HR leaders aren't planning deep budget cuts that negatively impact the ability to:

• Attract and retain top talent,
• Advance employees' skills, and
• Offer a total rewards system inclusive of employee-sensitive benefits and pay equity.

Striking just the right balance between HR investment and a healthy employee experience is tricky, and best executed when data led. The relationship between HR spending and employee experience is explicit. From pay and benefits to career and growth opportunities, employees are questioning their relationship with their employer. From their perspective, that relationship is clear and simple: It must be employee-focused, with a people-first approach marked by fair and equitable practices that allow all employees to flourish at work and at home.

Are your 2024 HR budget plans lined up to your workforce's expanding expectations and still aligned with the organization's upcoming financial targets?