How to retain top talent in 2024

The labour market is set for a shake-up in 2024. As hiring slows and businesses look to consolidate their workforces, how can you best retain your high performers?

In 2023, salaries have outpaced the expectations of employers and economists alike. Moving forward, changes in economic conditions and labour market pressures are likely to change the way employers look to pay their employees.

Let’s unpack the three trends affecting 2024 remuneration expectations, as explored in Mercer’s recent Australian Salary Outlook 2024 report.

1. Focus on retention

Job hopping has grown year on year for the past several years. In 2018, we saw an employee turnover rate of 17.9 per cent. In 2022, the rate reached 21.4 per cent. This was the highest recorded rate in more than five years. According to Mercer, 2023 is on track to continue the trend of increasing job hopping.

“This surge in employee mobility is the result of ongoing low unemployment rates, combined with a post-COVID career rethink – along with the necessity of seeking higher salary opportunities to counteract cost of living impacts,” explained Mercer.

“When employees vote with their feet, employers have no choice but to take note.”

That said, according to Mercer, there is reason to believe that job mobility rates might be easing. Not only will subdued economic growth mean higher unemployment, which might limit the sense of job choice abundance, but the rising cost of living pressures might reduce the willingness of employees to leave their jobs.

As mentioned above, however, cost-of-living pressure can have a confusing effect – some employees might walk in search of better-paying jobs, while others will stay put and focus on internal career development.

More significantly, employers are looking to consolidate their workforce rather than continue hiring new employees – a different state of affairs compared with 2022, when nearly half of employers planned to hire more staff. In 2024, said Mercer, only 28 per cent of employers are expected to take on more staff.

Further, new-hire premiums for executives decreased from 6.7 per cent in February 2023 to just 0.9 per cent in October 2023. As explained by Mercer: “This suggests organisations are actively focused on retaining their experienced leadership talent, rather than competing externally for senior talent.”

“Employers are being more selective in their hiring decisions, and they are also more likely to maintain their current workforce levels than expand.”

2. Moderation in salary growth

Australian employers forecast salary increases for 2023 at 3 per cent for both merit and overall payroll budgets. In reality, we saw an average of 4 per cent in payroll budget increases and 3.5 per cent for performance-based merit salaries.

Further, one in four employees received a pay rise of 7 per cent or more – with the greatest share of these employees belonging to the mining and metals sector, followed by non-financial services and high tech.

“Last year, employers made more cautious salary budget forecasts, but they have since increased those numbers due to ongoing retention challenges,” said Nithya Abraham, Mercer products leader.

“People, grappling with the pressures of rising living costs, are increasingly drawn to higher salaries elsewhere.”

Moving forward, employers are expecting salary increases to return to 3.5 per cent for 2024. As noted by Mercer, “employers are expecting inflation to stabilise, resulting in less pressure to increase wages”.

That said, not all industries will follow the same trajectory. For instance, manufacturing and energy are expecting 4 per cent salary budget increases over 2024, while non-manufacturing, non-financial services, and transportation equipment all expect increases below 3.5 per cent.

3. Variable compensation

In 2024, employers are expected to continue making use of variable compensation mechanisms like bonuses and profit-sharing. Compared with base salary increases, variable compensation can tie remuneration to business performance and can be a shorter-term investment for employers.

“We are seeing many employers think creatively with total rewards,” explained Mercer, “using tools such as bonuses or cost-of-living adjustments in more affected markets or for those paid below the market median”.

In 2022–2023, 25 per cent of employers used bonuses instead of base salary to increase total compensation, and 18 per cent increased other benefits to avoid increasing pay.

“Variable bonuses have historically been less than [employer] targets, but in 2022 and 2023, we observed short-term incentives were close to targets for most of the career levels in our survey,” said Mercer.

To best retain top talent in 2024, Mercer recommended doing the following:

1. Short-term strategy to address supply shortfalls: Create and communicate a better employee value proposition across financial remuneration, benefits, and experiences.
2. Near-term strategy to expand talent sources: Rethink your talent strategies with new opportunities, such as strategic workforce planning.
3. Long-term solutions to address demand: Reinvent work design to optimise the use of talent.