Where Raises and Bonuses Are Headed in 2023
There are two types of firms in the AE industry. The first worry that their performance will erode in a rising labor-cost environment because (a) they can’t pay their good people enough to retain them, (b) they’re unable to compete for the best talent, and (c) their operational model is stuck in pre-pandemic, anti-agile, zero-sum mode and cannot deliver profits when salaries increase. For this first type of firm, a rising-wage environment triggers a vicious downward spiral of self-inflicted poor decisions. They can’t hire enough people to meet client deadlines; frustrated clients fire them; backlog and employee morale erode; their best employees jump ship. And for under-performing ESOP firms, these are very risky times.
The second type of firm is leaning into #AEIndustry 3.0 and girding their loins to do what is necessary to reward, develop, and attract talent to execute flawlessly on their backlogs for another banner year of performance. The owners of this second type of firm continue to make a heck of an investment in their talent—one that is a step-function larger than they did pre-pandemic—and are realizing a commensurate return. Why? Because they—like 70% of the executives attending our upcoming Southeast M&A, Strategy, and Innovation Symposium in Miami—are expecting an even better year in 2023. And like 77% of the attendees, they see talent acquisition and retention as the primary constraint on performance.
Given the results of our 2023 Raises and Bonuses Survey from earlier this month, the first type of firm will fall further behind this year. Let’s take a look at the results.
Thank you, 200 times: A huge “thank you” to the 200 Word on the Street-reading firms that contributed to the survey. Of those, 44% had between 101 and 999 employees, 43% had 100 employees or fewer, and 13% had 1,000-plus employees. Over half (55%) were engineering firms; 17% were A or AE firms, 13% were EA firms, 5% self-identified as environmental, and the balance were a blend of surveying/mapping, landscape architecture, CM, geotechnical, and planning firms.
2023 Raise Environment Highlights: Over half (55%) of respondents are planning on increasing salaries between 6% and 9% in 2023. These are numbers that were inconceivable before 2020. In no boardroom in any design or environmental firm pre-pandemic did any executive ever even consider uttering these percentage labor increases. Forty-one percent of firms are budgeting raises of between 1% and 5%. And 3% of firms are planning on raises of 10% or greater. Firms in this last category have backlogs that dwarf their current and projected production capacity. Their strategy for this year is to (a) ensure that their current employees would lose money if they were to leave them and (b) outspend their competitors to get the talent needed to meet their obligations (and deliver record profits).
A deeper dive: In general, more architecture and AE firms are planning for lighter raises in the 1% to 5% range than their engineering and EA peers, who are budgeting 6% to 9%. Similarly, a greater percentage of firms with 1,000 employees or more are budgeting in the 1% to 5% range, compared with their smaller peers. In large part this is because all things being equal, larger firms already pay higher salaries than their smaller peers, and they tend to have better non-salary benefits and perks. The pressure on surveying/mapping firms appears to be intense with all of these respondents anticipating a 6% to 9% raise in labor costs this year.
2023 Bonus Environment: The message here is a little more nuanced. If last year was a bonus bacchanal for the industry (more bonuses more frequently than ever before), firms are feeling like 2023 will be more like the morning after. Forty-eight percent of respondents anticipate that bonuses will be about the same as last year, while 10% expect them to be lower. That said 42% anticipate paying out more in bonuses this year than they did in 2022.
A deeper dive: Across all size categories, environmental firms most frequently (56%) anticipate paying greater bonuses in 2023. Just over a quarter (27%) of architecture firms anticipate paying less in bonuses this year. Between this and their lower anticipated raises, architecture firms—particularly those with heavy exposure to the tech sector—are likely anticipating a more challenging business environment this year. That said, 55% of architecture firms are anticipating a similar level of bonus payouts in 2023. Fifty-three percent of engineering firms are anticipating that bonuses will match those of 2022, with 42% expecting to pay out more.
Behind the numbers: In general, one thing remains constant pre- and post-pandemic, the percentage of salary increase is inversely related to the seniority of the position. The higher up you are in this industry, the greater portion of your compensation comes from bonuses, equity awards, and perks. The smartest firms have figured out they need to run a different type of defense and offense now than before the pandemic. They realize that the primary reason employees leave is because of lousy supervisors. So, they outspend their competitors in creating a great people management environment with specific emphasis on imbuing their managers with people management skills, while at the same time treating their staff well financially. They pay at the top of the market in terms of salary and benefits and round those packages out with profit sharing and more.
Winners and losers: Our industry continues to navigate unprecedented change at the intersection of four generational trends—not enough talent to meet demand, a great and on-going recapitalization, rapid technological advances, and massive public-sector demand for services. The winners will be those firms that make the investments needed now to secure the talent to meet short-term production needs and longer-term leadership development and firm transition initiatives. The losers, well … the losers will continue to worry if they can pay enough for the best talent and look to “minimize expenses.”
Questions or comments, email or call Mick Morrissey at [email protected] or 508.380.1868.