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It’s Time To Talk Compensation: How To Get Employee Pay Right In 2022

Forbes Human Resources Council

Lisa Shuster, MBA, SPHR, SHRM-SCP, is the Chief People Officer for iHire, an industry-specific recruitment platform.

Amid rising wages, record inflation, low unemployment rates and pushes for pay equity, now is the time to talk about employee compensation—an HR topic that has never been so important.

According to the U.S. Bureau of Labor Statistics (BLS), average hourly earnings for private, nonfarm workers grew about 5.1% between February 2021 and February 2022. But, with inflation hitting a 40-year high, real wages are shrinking and paychecks aren’t going nearly as far as they did a year ago.

At the same time, talent shortages and the Great Resignation are driving companies to up the ante to attract and retain workers. This is not only stretching budgets but also leading to pay compression. Pay compression, in which new hires are brought in at salaries close to or equal to those of existing employees, can detrimentally impact staff morale and even perpetuate the employee revolving door.

Further, nationwide attention to pay equity and transparency adds another dynamic to the conversation, especially given ongoing DEI efforts. Organizations are targeting compensation gaps in their quest for achieving workplace equality.

During all this market turbulence, how can companies compensate new and existing employees in a manner that is fair, competitive and within budget?

Setting Pay For New Hires

Gone are the days when compensation decisions were made based on salary history; 21 states and counting have passed legislation banning employers from asking candidates for this information.

To set employee pay, first determine your pay philosophy. Do you want to lead, match or lag the market? The most common pay philosophy is matching the market, which involves paying at the 50th percentile or the median market rate. You may also apply different pay philosophies for different roles. For example, it’s difficult to hire experienced software developers right now, so you’ll likely need to lead the market or pay more than the 50th percentile to attract candidates.

With your pay philosophy in mind, gather market data for your job or jobs. (HR associations, staffing firms and the BLS are excellent resources for this information.) Review the going rates for similar positions within comparable industries, companies and geographies to establish your pay scale. Conduct a study like this at least annually to ensure you can maintain competitive compensation for all employees.

Keeping Up With The Market

Your compensation strategy must also address how you’ll adjust new and existing employee pay as the market changes. One option is simply to provide more frequent pay increases through merit or performance-based raises or cost of living adjustments (COLAs). Variable pay (bonuses) is also appealing since one-time compensation allows employers to reward employees without locking themselves into market adjustments when economic conditions change. Also, a one-time cost doesn’t increase your salary expenditure and other associated expenses, like the 401(k) match.

Aside from traditional raises and bonuses, financial incentives, like gasoline stipends, subway fare credits, internet reimbursement for remote workers or company-provided lunches, are viable ways to boost compensation. This leads us to our next topic: your total rewards strategy.

Touting Your Total Rewards Strategy

If you don’t have the salary budget to stay ultra-competitive, rest assured that there is more to the employee experience than compensation.

Should the unemployment rate remain low for the next five to 10 years, labor shortages will perpetuate, so bumping salary budgets alone won’t be enough to address recruitment and retention challenges. As a result, employers need to be creative and comprehensive with their total rewards strategy, which comprises compensation, benefits, developmental opportunities, recognition and other perks that motivate staff and enable a top-notch employee experience.

Consider offering mental health benefits, well-being and family caregiving support and financial planning services in your total rewards strategy. Invest in workers’ professional development with the idea that you can enable brighter futures through upskilling, internal career paths or debt-free college education. Though, flexibility is perhaps the most sought-after benefit of all.

Due to the pandemic, employees have grown accustomed to choosing how to integrate work with the rest of their lives, and they don’t want to give that up. Remember that flexibility goes beyond remote work; it can entail allowing employees to set their own schedules, embracing “flex time” (staff can adjust their work hours as needed), taking advantage of compressed workweeks and more.

Provide your employees with an annual total rewards statement (also called a hidden paycheck), which outlines the monetary value of all aspects of their compensation. It’s enlightening for them to see this breakdown, and you could receive plenty of gratitude in return. (Your payroll system likely has the functionality to generate such a statement, so it shouldn’t be a heavy lift.)

But don’t wait until you share the total rewards statement with your employees to communicate its significance. Employees are not often aware of the time, effort and dollars invested by HR and senior management on their behalf. This could lead to a lack of appreciation for your commitment to your workforce. Moreover, employees will focus on their paycheck without acknowledging the total rewards received.

The Bottom Line

Winning the war for talent in 2022 will be more about culture and people—not just about the money. However, ancillary benefits don’t necessarily mean employers can ignore pay entirely. Pay must be part of the equation and part of your total rewards strategy. If you're not talking compensation when everyone else is, you will miss out on loyal, skilled and engaged employees.


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