Based on current trends, SHRM believes that resurgent inflation is causing employers to revisit their pay budgets and planning more often than before. In reviewing how inflation affects compensation, SHRM noted that the “recent spike in prices is expected to drive salaries and hourly wages higher next year.” And if rising inflation continues, employers will need to alter their anticipated budgets for benefits and compensation costs.
This was as of June 2021, when the “Consumer Price Index for All Urban Consumers (CPI-U)” rose 5.4 percent year over year. According to the U.S. Bureau of Labor Statistics report in July 2021, that record was the most significant 12-month increase since 2008. According to the report, the CPI-U increased 0.9 percent in June after rising 0.6 percent in May. Unfortunately, inflation has risen to the highest levels in decades in U.S markets, with ripple effects trickling down several aspects of the economy.
A typical example is the impact of rising inflation on workers’ compensation. Today, the average employee is not only interested in breaking into the pool of employed labor but is also very interested in weathering economic uncertainties comfortably. This combined effect of increased CPI-U and post-pandemic realities is an inevitable reason why employers are faced with the dilemma of competitive compensation. As of March 2021, the average lowest wage that U.S. job seekers are willing to accept for a new job was $71,403, up from $61,737 a year before that (at the start of pandemic lockdowns) and $62,365 in March 2019.
Why Would Employers Need to Adjust Comp or the Benefits Budget?
This is a no-brainer and can be traced to the leading causes of rising inflation. With the soaring inflation, prices have gone up in many areas; the energy conundrum and higher interest rates are significant contributors. More employees now want more ‘cash in hand.’ And beyond paying bills, an average professional still intends to afford the life they want. Some companies are already responding to the demand for increased wages and salaries. As we see in the tech giant Cisco Systems Inc. one way to respond to concerns about soaring inflation is by shifting a slice of its workers’ pay out of bonuses and into their base salary.
While there are other ways to address the situation, the core focus is to enable employees to squeeze out more money for essential supplies like gas, food, rent, etc., without being left high and dry after payday. The Labor Department’s report on the consumer price index (CPI) increase in May by five percent from 12 months earlier shows how serious the situation is.
Aside from factoring in CPI considerations, companies might want to consider another critical perspective: avoiding great resignation. So, to keep the best employees on the team and have them focused on productive work, employers will probably need to reassure workers that their compensation will reflect economic realities. But salaries are not the only dimension to ensuring a higher retention rate. More competitive companies are wooing employees with better benefits, better work flexibility (such as remote work), and a more attractive work environment.
According to Santa Rozkalna, CPO at the Latvian printing startup, Printful, “New employees recognize their worth, and we have to compete with other companies in not just salary, but also other benefits, work environment, and even company values and beliefs.” Startups are the most impacted in this case, as they are often not as funded as the larger enterprises they compete against. As an employer, a more proactive approach to unstable macroeconomic trends might be to cut down on office spaces and allow more employees to work from home — just like Cisco. And since the market is driving salaries, employers might want to take inspiration from the tactics employed by Printful.
The company decided to hire and train more junior talent. While chatting with Sifted, Rozkalna adds, “There will always be certain talent groups and skills you will have to be ready to pay more for,” so how a company deals with the situation depends on their chosen strategy.
Pay Raise Expectations in 2022
Wondering how much a pay raise employees might be expecting today? Trading Economics, an online platform that provides historical data and economic forecasts, has some insightful answers. Trading Economics’ econometric models projected a long-term U.S. wage and salary growth trend of around 3.6 percent in 2022 and 4 percent in 2023.
In other words, companies hoping to recruit top talents should, in addition to making competitive considerations for work flexibility and employee benefits, review their compensation budget with these figures in mind. Experts believe that if the current inflationary trend continues through September 2022, not only will compensation trend up 3.6% in 2022 and 4% in 2023. The result could be the most significant annual cost-of-living increase in Social Security benefits since 1983.
Cost of Labor Forecasts in the U.S.
In a recent Bureau of Labor Statistics news release, Wages and salaries increased 1.2 percent, and benefit costs increased 1.8 percent from December 2021. Unfortunately, the figures may not be going down any time soon. The increase is expected to increase in line with growing inflation. The cost of labor has always been a concern for the CFOs in the U.S.
According to the CNBC Global CFO Council survey for Q2, released in June 2021, U.S.-based chief financial officers from large public and private companies see inflation as the most significant external risk factor that their businesses face, more than COVID-19, cybersecurity, and consumer demand. And more financial officers from companies around the globe are worried that price hikes may be needed if the inflationary trends continue into 2022.
CNBC also reported that the cost of labor forecasts in North America, the U.S., in particular, far exceeds the cost expectations in other regions. Although economists expected a waning pandemics followed by relaxed COVID restrictions around the globe and a return of workers to the labor force, the reality today — in line with the Bureau of Labor Statistics’ recent data report — shows a different trend. U.S. employment costs have accelerated in three of the last six quarters and are well above pre-pandemic trends.
Should Inflation Be a Basis for Compensation Consideration?
Rozkalna that “...inflation changes quickly over time, and varies widely across markets.” She added that inflation is a very dynamic variable, and using it as a defining factor for compensation packages, may imply that hiring cycles can span several months or more for mid-level or senior roles. Instead, her company, Printful, periodically reviews cost-of-living data in the markets they’re active in as an employer and adjust their compensation packages accordingly.
However, considering the high level of competition when offering better compensation, low-level or junior staff and principal officers may often take most of the heat. It is common for companies to focus more on retaining staff members whose absence would impact the company the most. While the economic factors facing businesses in the U.S. may be similar, other factors like local employment policies, industry, and financial strength of each company can influence how it responds to workers’ demand for compensation raises.