Do you know what your employees really want for the holidays? Pay increases that reflect changes in the job market and economy.
As the end of the year approaches, compensation planning for pay increases is always top of mind for employers — but especially this year. Wages are looking to go up in 2022, but even if pay increases are higher than average, they still probably won’t keep up with inflation.
We know that wages are going to go up because Payscale is currently fielding its annual Compensation Best Practices Survey. This is the largest survey dedicated to compensation management out there. The survey is open for HR leaders and compensation professionals through the end of December and the report comes out in February. Although the data isn’t final yet, some insights have emerged.
Among them is that a significantly higher percentage of companies are looking to give pay increases than we have seen in previous years, and those pay increases are also looking to be higher on average than the three percent we have seen as the norm over the past decade.
However, inflation was reported as 6.2 percent in October, the highest increase in inflation that we have seen in over 30 years. That’s already more than double the average annual pay increase — and still climbing.
There was already contention over whether three percent is too low to be a meaningful pay raise, as around two percent is usually eaten up by inflation in a normal year. This year, more employees may feel undercut by pay increases below inflation, which could exasperate turnover in an already hot market.
Should employers increase pay to combat inflation?
These dynamics are not simple. The challenge is that raising wages to keep pace with inflation could just cause inflation to go up higher as prices are adjusted to combat the increase in expenses. Then what? Do you raise wages again? Wouldn’t that just cause prices to increase again? Such a cycle would not be good for the economy.
Economists have also issued cautionary predictions that current levels of inflation are a temporary reaction to COVID-19’s impact on the supply chain. The hope is that increasing vaccination rates, or a tempering of the lethality of the COVID-19 virus, will allow production levels to return to normal.
However, this would have to be worldwide, and there are numerous obstacles to achieving that. In addition, it is unlikely that deflation would occur once the pandemic is under control, which would mean higher pay increases are still needed to hold onto talent.
There is also a distinct possibility that even with the pandemic under control, the labor force will not return to normal.
The truth about “labor shortages”
When the pandemic hit in 2020, corporations panicked and over 20 million U.S. workers lost their jobs in the month of April alone. Those that retained their jobs were forced to work harder, for longer hours, with less help, and under more pressure, while wearing masks for the duration of their shifts, sometimes under duress from customers who are angry about shorter opening hours, missing merchandise, mask mandates, and vaccination policies.
Essential workers have endured hazardous working conditions, and yet somewhere between a fifth and a third of employees had their pay cut or their pay increases deferred. They have also been referred to as “frontline workers” as if their lives are collateral damage.
That’s not hyperbole. Over 800,000 U.S. citizens have died of COVID so far, and many more have struggled with complications from long COVID. We’re on track to make that over a million. What percentage of the “out-of-work” essential labor force is actually dead?
That data hasn’t been released, but the outcome is that workers are reevaluating their priorities. Holding down a job that doesn’t pay enough, where the benefits are lacking, and where the health risks are high, may just not be worth it. People are wondering if they are better off making a living doing something else — or just living on less.
Many older workers have retired early. Some have started their own businesses or gone back to school. Others have discovered that maybe they don’t actually need to work, either because they have enough in savings to outlast the pandemic or because they can get by on one income in a formerly double income household.
The media has been calling this The Great Resignation.
At the same time, the opportunity to switch jobs has never been so good. According to the Bureau of Labor and Statistics, there are more hires than separations, but there are many more job openings than hires, especially compared to previous years. With demand outstripping supply, people that do want to work have ample jobs to pick from. As a result, organizations are struggling to both attract talent and retain talent.
This is being called The Great Reshuffle.
One of the primary reasons people change jobs is because they can make more money switching employers than staying put. Annual pay increases of three percent on average simply can’t compete with the double digit increases that workers can get by changing jobs.
Payscale’s recently released End of Year Hot Jobs Report shows which job titles are seeing the biggest increase in salary profile creation on Payscale.com among job seekers. Positions in retail, recruiting, marketing, science, and technology all make the top of the list.
Also on the list? Compensation analysts. That’s right: compensation analysts are checking what their position is worth with Payscale in numbers large enough to make that job title land in the top ten fastest growing jobs by profile growth among job seekers.
In 2021, employers recognized that in this market, they need compensation analysts. They are actively competing for this talent.
All the job positions on Payscale’s End of Year Hot Jobs Report are likely to see wage growth soon if they aren’t seeing it already, and they’re not the only ones. Payscale also pulled a list of hot jobs by fastest growing wage growth. Media directors have seen wage growth of 35 percent. Bartenders, 18 percent. Assembly line workers, 12 percent.
In other words, in addition to inflation, employers also have to worry about market adjustments.
Tactics to attract and retain talent
There’s a lot that organizations can do. Top of mind should be an active effort to create a better employment experience, from the application process to performance reviews.
For one, organizations should look to streamline recruiting processes that have become impersonal and over-dependent on automation. Many companies have no idea how cumbersome it is to apply for a job these days or how frustrating and soulless the interview experience can be. Resumes go straight into applicant tracking systems (ATS) where they may never be seen by human eyes. Interview processes are over-involved, with multiple interview loops, presentations, and evaluations that can take months.
Organizations should also make sure that their job descriptions are thoughtfully constructed and reflect the actual work they need done. For example, many organizations have positions that are described as “entry level” while requiring several years of experience. This alone is one area where organizations might find a flood of eager workers if they adjusted their standards for what makes a great hire and invested in training rather than sniping.
But most importantly, organizations need to get pay right.
Too many employers are insisting there aren’t any qualified workers when really there aren’t qualified workers at the prices employers are hoping to pay. The labor market has changed, and it continues to change daily. Some people have dropped out of the workforce. The rest want better. Organizations need to up their game. That starts with investing in fresh salary data so they can adjust their pay ranges appropriately and make offers that are actually compelling.
They also have to retain the talent they have.
Compensation planning around pay increases for 2022 is essential and requires salary data that is up-to-date. Workers are much more likely to remain at their current organization if they feel confident that their pay is fair, which means adjusted to the market and also in keeping with internal pay equity while still rewarding individual performance. Other aspects of a job matter too — the culture, the manager, the team, the work, the environment, the growth potential, and forms of recognition other than salary — but if the pay isn’t fair, employees aren’t going to stay, especially not in a job market this hot.
Fair pay also can’t be something employers assume that their employees understand. You need to explain it to them. You need to provide total rewards statements and manager training on pay communications that references the data used to inform your compensation methodology.
Pay analysis gives you a competitive edge
There is a reason that compensation analysts are in such high demand. Compensation planning in difficult market conditions is not new, but it does require the ability to analyze market data as well as the competency to build and maintain formal pay structures that can flex to accommodate shifts in the market without putting the business at risk.
Compensation management is not simple. It is also not the same for every type of employee. For example, it is common for employers to manage pay for hourly wage workers, especially low wage workers, differently from salaried workers. However, more attention may need to be paid to lower wage earners this year when it comes to pay increases.
Think about it.
A base pay increase of three percent or so tends to be underwhelming to most employees most years. But base pay increases of three percent or less are potentially catastrophic to low wage earners when inflation is high.
A three percent increase on a salary of $30,000 a year is $900. Split across 52 paychecks, that’s $17 extra dollars a week. That is before taxes. Meanwhile, inflation hits employees with lower earnings harder than employees with higher earnings. A 6.2 percent increase in the price of everyday goods can put low wage workers living paycheck to paycheck in dire circumstances.
These workers are practically forced to change jobs.
Younger salaried employees also ought to see faster and steeper pay increases than more established employees if you don’t want to lose them. A recent graduate may enter the job market at an artificially low salary for the pay range of their position because they don’t have any experience. This is especially likely for graduates who joined the workforce during the pandemic. But experience is gained quickly, and compensation needs to keep pace. The demographic most likely to job hop are younger, fast-growing employees who know they can reach the median pay for their position more swiftly by changing organizations.
Some employers view job hopping unfavorably. However, it’s also difficult to fault this mentality when you are able to appropriately analyze the dynamics of pay. From the employee’s perspective, if they were brought into a company at a low salary because they lacked experience, they expect to have their compensation adjusted once they have gained the experience they initially lacked. And yet, many organizations don’t do this, and instead will establish a maximum increase for base pay — often a meager five percent — even for employees being paid below their pay range.
This is dangerous, but in a market where inflation alone is over six percent, it’s a recipe for turnover.
Market data is imperative to get pay right, which is why we encourage employers responsible for pay decisions to fill out Payscale’s Compensation Best Practices Survey. Even if you don’t have a competency in compensation analysis, you can learn from organizations that do.
We also encourage individuals to fill out a salary profile with Payscale and share it with their employer.
The bottom line
Let’s not mince words.
If you are an employer and haven’t thought about this, your inertia may signal to your employees that you don’t care about them. Even if it’s only a perception that pay is not fair, you are more likely to lose them.
If your organization is resisting pay increases in amounts high enough to retain your current workforce because “it’s expensive”, you need to consider the ramifications of not making that investment.
What will it cost to replace your workforce at the current market rates? What knowledge and productivity will be lost if you have to hire and train all new people? How long will that take?
Because that’s the scenario you’re are facing.
Everyone deserves to be paid fairly. Make sure you can show that you do with market data.