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How Business Leaders Handle Employee Compensation in Inflationary Times

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Small business owners can be forgiven if they hear the echoes of carnival barkers during these inflationary times:

“Around and around, it goes, where it stops, nobody knows!”

Unlike a “Wheel of Fortune”, however, the current economic climate is more like a “Wheel of Mis-Fortune” for small businesses as rising costs across the board have them in a vice grip with higher prices for goods, raw materials, rent and transportation on one side and escalating salary and benefit demands by employees on the other.

“After fighting to survive a yearlong pandemic and a national labor shortage, employers and employees have been served up one more helping of hardship on their financial plate: inflation,” writes Deanna Cuadra in Employee Benefit News. “The Consumer Price Index rose nearly 8 percent this year – a 40-year high for inflation in the United States. Since inflation measures the increase in the prices of goods and services, this means the cost of living in America has gotten even higher, taking a toll on both employees’ salaries and employers’ budgets as they try to remain competitive in today’s tight labor market.”

Inflation Likely to Remain Elevated for a Long Time

Annual inflation in the U.S. “slowed” to 8.3 percent in April from a 41-year high of 8.5 percent in March, but less than market forecasts of 8.1 percent.

Prices that hit employees and employers on their daily commutes and along their business transportation routes rose even higher with:

  • Energy prices increasing 30.3 percent in April (down from 32 percent in March)
  • Gasoline prices up 43.6 percent in April (down from 48 percent in March)
  • Fuel oil increased a shocking 80.5 percent in April (up from 70.1 percent in March).

Consumers also faced increased food prices (up 9.4 percent, the most since April 1981) and shelter costs (up 5.1 percent).

“Despite the slowdown in April which suggests that inflation has probably peaked, the inflation is unlikely to fall to pre-pandemic levels any time soon and will remain above the Fed’s 2 percent target for a long time as supply disruptions persist and energy and food prices remain elevated,” said Trading Economics.

Employee Raises Do Not Keep Up with Inflation

Many American employees have gotten raises in the past year but those increases are not keeping up with inflation.

“Over the past year, many workers have found their salaries aren’t enough to cover rising prices due to soaring inflation—and this includes employees who received raises. Among those who received raises, two-thirds received an increase of just 1 percent to 5 percent of their salary, well below the current rate of inflation,” reports Lisa Rowan in Forbes.

A YouGov survey of 1,500 adults for Forbes Advisor found that only 56 percent of Americans who work full time received a pay increase in the past year, which exposes many employers to the dangers of losing their staff to higher paying jobs.

The survey found that those reporting receiving a raise last year:

  • Making under $50K: 46 percent
  • Making $50 to $150K: 58 percent
  • Making over $150K: 67 percent

The survey also found that most of those receiving raises, got a bump of 5 percent or less, well below the current 8 percent inflation:

  • 1 to 2 percent raise: 29 percent
  • 3 to 5 percent raise: 35 percent
  • 6 to 10 percent raise: 15 percent
  • More than 10 percent raise: 14 percent

Bureau of Labor Statistics show that while salaries increased 5 percent and benefits increased 4.1 percent for the 12-month period ending March 2022, private sector wages adjusted for inflation declined over that period with wages down 3.3 percent and benefits down 4 percent.

Small Businesses Must Reconsider Pay Strategies

Traditionally small business owners focus more on the supply and demand of labor when it comes to compensation vs. inflation.

“Most employers focus on the cost of labor, rather than the cost of living when determining pay strategies,” Lauren Mason, senior principal at Mercer asset management firm told Employee Benefits News. “That’s why we often see a big discrepancy between the cost of living and cost of labor. It’s very much driven by the local supply and demand of the labor market.”

A Mercer survey says employers need to be prepared to meet worker demands for inflation-adjusted salaries with benefits with 43 percent of employees reporting they want action taken.

“While employers tend to decide salaries based on what’s considered competitive in their labor market, inflation combined with talent shortages may force employers to reconsider their pay strategies,” writes Cuadra.

One strategy, according to the Mercer survey, is that almost half of organizations said they are conducting additional salary reviews for all or some employees as a response to inflation.

“Employers, if they’re smart, are going to pay attention to inflation because it matters to employees,” Lori Wisper, managing director at insurance company Willis Towers Watson told Employee Benefits News. “I do anticipate in 2022 that if we continue with worker shortages, employers will have to raise pay.”

Small businesses need to be transparent about how wages and benefits are determined, so their employees understand the rationale behind their paychecks.

Benefits and work culture should not be overlooked as important factors to help attract and retain top talent.

“Look at the affordability of your benefits and how it’s impacting their take-home pay,” Mason said. “Look at the broader work environment to see if there are high levels of burnout and what’s driving it.”

Ultimately, employers may have their hands forced by employee demands for greater compensation with a survey of 5,000 U.S. workers conducted earlier this year by Grant Thornton LLP, finding:

  • 40 percent expect pay increases of greater than 6 percent this year.
  • 31 percent expect more than 8 percent.
  • 21 percent anticipate receiving more than 10 percent.

"American workers have found their voice during the pandemic, and they are perhaps keener than ever to ask for what they want—or find it elsewhere," said Tim Glowa of Grant Thornton.