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Talent in a tight labor market: imperatives for HR leaders in 2023

This year has witnessed a dramatic alignment of HR priorities compared to 2022, with a greater consensus among HR leaders globally on the top priority for the year ahead. The latest reveals that the need to improve the employee experience (EX) for key talent is at the top of the agenda for HR, reflecting organizations' concerns about retaining their most valuable employees.

By contrast, HR leaders’ top priorities last year varied significantly by country and encompassed diverse objectives, such as redesigning work to improve agility, and ensuring inclusive workforce participation (see exhibit 1). To improve the EX, 50% of HR leaders this year say they have invested in training on collaboration tools. Still, only 30% are redesigning meetings to improve effectiveness, and just 28% are helping individuals set boundaries and manage energy, according to the Mercer study. Accelerating progress on the EX will be crucial, given that the percentage of employees who feel energized at work dropped significantly from 74% in 2019 to 63% in 2022. Moreover, worker fatigue continues to be cited as a top barrier to delivering on transformation goals this year.

Tight labor market conditions, low unemployment, and missing workers are driving the emphasis on employee retention – and hence the EX – as the defining trend of 2023. In January this year, in the US fell to historic lows of 3.4% – the lowest since 1969. Meanwhile, an aging population is reducing the pool of prime-age employees: changing demographics account for the in the US. Workforce concerns even trump a darkening economic outlook. Another Mercer survey of CEOs and CFOs shows the majority expect a global downturn lasting one to two years; still, they believe in 2023, with those firms expecting a longer recession prioritizing talent retention.

At the same time, a severe inflationary crisis is creating additional pressure on employers, with many reaching for wage increases to stay competitive. Organizations across industries are resetting their approach to compensation and rewards with a range of short-term strategies (see exhibit 2). Across sectors, companies are managing rewards by providing cost-of-living adjustments in impacted markets, implementing a bonus/pay adjustment across the entire workforce, and providing additional bonuses. In the technology and automotive sectors, for instance, 34% and 38%, respectively, say they are giving all workers a bonus or pay raise. As the global economy slows, however, some organizations are realizing that short-term pay fixes may not be enough. More nuanced and lasting changes around pay will be required, such as promoting fairness, correcting internal-to-external pay inequity, and increasing other benefits. The reason? are twice as likely to say their company makes fair and equitable decisions on pay and promotion, a finding that has stayed consistent year over year.

Organizations are acknowledging, too, other vital levers for retention: the need to prioritize flexible work and total well-being. Employees rank flexibility as the second most crucial factor for staying with their employer, just behind job security. And well-being has clearly been catapulted to center stage: last year, executives cited total well-being as the workforce initiative that would deliver the second-highest business result (second only to reskilling). To retain top talent, organizations must design flexible working models that are inclusive and invest in programs that enhance social, mental, physical, and financial well-being.

Yet, progress varies widely on these two fronts (see exhibit 3). Almost three-quarters of organizations in Australia and Italy already offer flexible work options for all (one of the baseline goals in the ), compared to just one in three in China. And commitment to stay the course on well-being may be waning, with this year saying well-being will be an area to cut if the economy fails to rebound. Globally, only half of companies are focused on total well-being for all employees – with Italy, China, and Hong Kong lagging in total well-being plans. Amid continued economic volatility and evolving workforce needs this year, it will be essential for organizations to accelerate progress in these areas known to help employees thrive.