Benefits and Compensation

Tips for Navigating Pay Raise Roller Coaster in 2022

The apparent lack of qualified workers has become a well-publicized conundrum during the COVID-19 pandemic. You can’t drive by a retail establishment without seeing a “help wanted” sign in the window. Theories abound about why jobs are going unfilled. It’s common to assume the answer is to offer higher pay rates. Although the variables in the current economic environment are many, pay should definitely be considered. Depending on how your organization has fared over the past two years, however, you may or may not be in a position to raise everyone’s salary. So, how does your organization allocate its finite salary budget most wisely? Start by understanding the market.

Salary Market

Employers have reported higher actual increases to their salary budgets in 2021 than were previously predicted. According to a Gallagher USA report titled “Labor Market Inflation Indicators 2021-2022,” the actual increases in salary budgets for the first three quarters of last year averaged 3%, 3.4%, and 4.6% respectively. Most previous research for the year had predicted hikes averaging 3%.

It seems 2022 may continue the trend. The Conference Board conducted its 2021 salary increase budget survey in April 2021 and again in November. The projected salary budget increases went up by almost 1% from April to November. The board now expects salary raise budgets for 2022 will be 3.9%, which would be the highest growth rate since 2008, according to SHRM researcher Stephen Miller.

Indexing Pay Structures

One compensation principle often misunderstood or overlooked is that pay is typically based on the going rate (i.e., market rate) for particular work. It isn’t based on the cost of living in a geographic area, inflation figures, or the Consumer Price Index. Your organization should incorporate the concept into its pay structure and be prepared to respond to employees who advocate for higher salaries based on the other metrics.

Another important principle to apply when maintaining your pay ranges is to adjust your ranges by the predicted overall percentage increase minus 1%. Over time, pay structures have been shown to lag overall salary budget increases by 1%. For example, if the predicted overall salary budget hike is 3.9%, you should adjust your ranges by 2.9%.

Five Ways to ‘Get the Most Bang for Your Salary Bucks’

So, how do you allocate your salary budget most wisely? Generally, certain principles apply when distributing pay increases, such as don’t try to spread the dollars perfectly even among your workforce. Given the current labor market and uncertainties about the future, you might consider some of the following strategies to get the most bang for your salary bucks.

First, hard-to-fill jobs are usually the most competitive positions in the market. It’s a simple supply-and-demand rule. When a certain skill set or professional expertise is scarce in the marketplace, employers are willing to pay more just as you should. When considering where to distribute your salary dollars, the competitive job openings should be your main concern so you can hire and retain valuable employees.

Second, on the flip side, if you know certain employees are currently paid at the going market rate, save your precious salary dollars. As an employer, your goal should be to pay employees at market according to how you’ve defined your competitive market, e.g., by industry, geography, or organization size.

Third, rather than adding ongoing expense to your budget by increasing base salaries, make use of other monetary rewards such as a spot prize to an employee for a job well done or short-term incentive bonuses payable quarterly or twice a year. Knowing employee burnout is high and rising, you could offer additional paid time off (PTO) or the ability to roll PTO over to the following year.

Fourth, if employees have sent one consistent message about recent changes in the workplace, it’s that they expect, and are even demanding, flexibility. One of the reasons jobs are going unfilled is because workers don’t want to return to a rigid workplace. Remote work and individual accommodations, such as supporting employees with childcare issues, have become normalized to the extent people don’t want to go back. Use flexibility as a different type of currency among workers who value it.

Finally, money isn’t the only motivator (or demotivator). If you haven’t examined your organization’s culture and employee relations philosophy lately, do it! For employees who have been working remotely for almost two years, engagement in the organization’s mission and a sense of belonging may be things they are missing without even realizing it. Consider what the leadership team can do to foster increased employee engagement as well as what individual managers can do to ensure everyone feels part of the team.

Bottom Line for Employers

The world of work has been transformed by COVID-19 and economic uncertainty. Indeed, it is still being transformed. Therefore, you must stay abreast of compensation trends in your industry and job market. Knowing your labor market is essential for establishing a salary budget. Knowing how and where to spend the dollars most effectively is crucial for maintaining a quality workforce.

By understanding not all staffing issues are resolved by increasing salaries, you’re free to be more deliberate with your compensation budget and creative in designing a workplace that truly meets employees’ needs.

Jennifer Blake, CCP, is a senior HR consultant at PerformancePoint LLC in Memphis, Tennessee. You can reach her at jblake@performancepointllc.com