Market Dynamics Influencing Compensation Planning

Data-driven compensation planning for rising inflation and increasing costs of labor

Inflation is at its highest annual rate in over 40 years. The rising cost of living layered with an increase in competition for labor has created extraordinary challenges for organizations to pay fairly and competitively. Leveraging timely market data to inform competitive, equitable and livable wages will deliver better talent, culture and business results.

Cost of labor versus cost of living

Most organizations have not had to consider cost of living adjustments (COLA) in annual wage reviews, but now they do. Increases will vary in degree and timing depending on geographic, occupational, and industry characteristics.

The Employment Cost Index (ECI) from the Bureau of Labor Statistics (BLS) measures the change in the cost of labor, and the Consumer Price Index (CPI) measures the change in consumer prices, otherwise known as inflation. Historical trends reveal that as prices rise, so does the cost of labor. It’s important to understand that both cost of labor and consumer prices have their own unique drivers:

  • Cost of living is an expression of the supply and demand for goods
  • Cost of labor is similarly an expression of supply and demand for labor

Cost of labor might not have applied previously where the competition for talent was high. Whether it is a skill or labor shortage, businesses must plan for attracting and retaining talent with competitive compensation when talent is scarce and when workers need more money simply to maintain their lives.

Impact on retention

Despite unemployment being high in recent years, businesses still face challenges in hiring and retaining talent—with voluntary turnover being higher than previous years. Lack of sufficient pay increases are one of the key reasons why organizations are struggling to attract and retain talent in the current economic climate. It would stand to reason that the risk of turnover increases for organizations that fail to give pay increases to make up for pay cuts or freezes from 2020.

There are multiple reasons to give a pay increase, including for performance, market adjustment, internal pay equity, hot skills, tenure, and more. As unemployment started to decrease and inflation started increasing, compensation planning for base pay increases became critical to get right to mitigate costly risk and turnover. Some organizations separate out inflation from merit increases and market adjustments, which may be a valuable strategy for salary budgeting season in 2023.

Data-driven compensation planning is key

Projecting salary increase budgets for next year may feel like a daunting task. Organizations need access to accurate and real-time market data to inform compensation budgeting with planned salary increase budgets, pay structure adjustments, and promotion increases.

Competitive compensation adjustments are among the best tools for maximizing talent strategies. A compensation strategy built on data-driven decisions will ensure that businesses are securing and retaining talent accurately, fairly, and competitively. Diverse sources of salary data will help organizations keep pace of market trends as the workforce, legislation, and economy continues to evolve.

Modern compensation solutions for modern times

Compensation is a critical piece of a talent strategy for the growth of the business. Pay structures and ranges built on accurate market data aligned to the talent strategy attracts and retains the right people with confident and competitive offers and increases.

Payscale has the data, technology and services to support any stage of the compensation cycle as organizations continue to navigate through the impact of rising inflation and increasing costs of labor. Read more powerful research from Payscale’s data science and editorial teams, as well as valuable insights on compensation management, data trends and best practices.

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