Historic inflation across the United States has consistently generated headlines over the past several months—and understandably so. Year-over-year inflation has topped 8%, the highest level reached in over 40 years.
But these numbers aren’t as straightforward as they are often made out to be. That overall 8% inflation level doesn’t get distributed evenly across everything in the economy with a price tag. Some expenses may have increased by more or less than 8%. Others may have increased by much more, while others still may have barely moved.
Inflation also has a local component, as well, with prices in one part of the country reacting differently than those in another part. Finally, there is great uncertainty over how long high inflation will continue into the future.
All of this variability and uncertainty is causing headaches for employers looking to attract and retain talent in an already tight labor market. How should employers be thinking about inflation as they address employee compensation?
We spoke to a number of industry leaders and experts to get some insights.
Inflation Inflates Already Rising Wages
The current inflationary environment isn’t taking place in a vacuum. One of the consequences of the COVID-19 pandemic has been an exodus of millions of workers from the labor market, resulting in a general shortage of labor supply. As with anything else, when supply decreases without a corresponding drop in demand, prices rise. And, in fact, wage pressures were creating challenges for employers even before recent spikes in inflation.
Some employers may be able to absorb the added pressures of inflation on employee wage demands, but there’s only so much room for employers to increase wages given limited profit margins. “As 2022 progresses, the scarcity of workers, expanding skills gaps and high inflation levels are likely to result in increased volatility in how employees are compensated,” says Dustin Burgess, GM, Total Talent Intelligence at PRO Unlimited. “This is a trend we saw in our spring U.S. Labor Market Report, which found that, for lower-level manufacturing roles making $25 per hour and below, many organizations responded to elevated voluntary termination rates by increasing pay,” he adds. In addition, he notes, average hourly pay rates increased from $13.56 to $15.31 (13%) between 2020 and 2021—a significant increase for lower-level manufacturing roles.
“Finding top talent and holding onto them is essential for fighting the worker shortage, but the market is tight and it’s only getting harder to source the right candidates,” Burgess says.
Cutting Costs Elsewhere
Inflation and labor market shortages are often temporary bumps that get smoothed out over time. However, “temporary” can last a painfully long time and start to feel like “forever” for employers struggling to make ends meet.
Daniel Javor, Founder and CEO of Step By Step Business, argues that companies should be looking at longer-term structural adjustments to help save costs. Cost saving not only is beneficial in the long term but also may create space for increasing employee wages in the immediate term if that’s what it takes to retain talent.
Javor even suggests that companies may be able to offset some of the costs of inflation by leveraging cost savings recognized through a widespread shift to remote work and the corresponding reduction in office expenses.
The Key Role of Effective Messaging
Ian Kelly, CEO of NuLeaf Naturals, argues that employers should get out ahead of the conversation on wage increases. There’s no doubt it’s on employees’ minds, so why not take the initiative and frame the discussion as constructively as possible?
“Before they ask questions, proactively address their potential concerns and clarify misconceptions about disparities,” Kelly suggests. “Help them understand how much they’d make in another job and how their current payment compares to the market. This eliminates assumptions made based on external sources and helps employees understand that their pay is at par with industry standards amid inflation.”
Moreover, Kelly recommends working with managers to help them in their own discussions with their subordinates when it comes to compensation. “While managers might not be confident talking about pay with employees, it tends to get harder when they finally have to address inflation,” he says. “Considering this, the first step is to identify employees who are likely to have concerns. Next, connect with them compassionately because the pay is a sensitive issue. The idea is to have an empathetic conversation while carefully addressing the issue of inflation. With this approach, there’s a higher chance that the employees will understand and align with the company’s mindset.”
Rethinking Bonus Structures
Kevin Huang, CEO of Ambient Home, suggests looking at bonus structures as a way to closely tie compensation to performance. While this doesn’t eliminate the need to address inflationary pressures, it may make compensation more efficient by tying it more closely to actual outcomes.
“With performance-based bonuses, your employees are rewarded in direct proportion to their performance, affecting your company’s profitability directly or indirectly,” Huang says. “Thus, your compensation expenses would increase or decrease according to your company’s performance and profitability.”
Of course, not all job roles are obvious candidates for bonus structures, but employers might be surprised at how many opportunities there are to tie compensation more directly to performance.
Pay Is Just Part of the Equation
Many workers may roll their eyes at the notion that “money isn’t everything,” but it’s absolutely true. Pay is perhaps the single most important factor contributing to employee satisfaction for many workers, but that’s not true for all, and even for those for whom money is the most important factor, there are plenty of other important aspects of job satisfaction, as well.
Employees who feel like they are valued, have opportunities for growth, enjoy flexible schedules and the ability to work remotely, and have ample vacation time and solid benefits may certainly value their job compared with another opportunity that pays more but lacks the other nonmonetary perks.
Employers can often find creative ways to increase employee satisfaction without resorting to a purely financial strategy that uses salary and bonus as the only available tools.
Levels of inflation not seen in over 40 years, on top of an already tight labor market, have forced many employers into difficult circumstances when it comes to employee compensation. Workers are seeing their own costs increase and standards of living decrease, and it’s natural for them to look to their employer—generally their primary source of income—to help make up the difference.
Employers need to be creative and communicate openly and effectively in order to avoid losing top performers, especially those approaching the point where they may be pushing the limits of companies’ ability to address rising salary demands.
Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.