Employee wages increasing, but not because of inflation

The highest inflation rate in over 40 years combined with a competitive job market may have your firm feeling pressure to increase wages for your employees.

According to a U.S. Compensation Planning Survey from asset management firm Mercer, more than a third (37%) of employers have been responding to employee expectations for wage increases.

The survey put the average 2022 merit wage increase budget at 3.4% – the highest it’s been since the 2008 financial crisis. And the average base pay per employee from 2021 to 2022 increased an average of 4.9%.

Inflation not driver of increase in wages

Skyrocketing consumer prices across the board have many employers wondering how to best manage their compensation budgets. However, it’s important to keep in mind that data compiled by Mercer from the past two decades shows no direct impact on compensation budgets that’s related to inflation.

Mercer predicts the current high inflation driven by COVID-related supply problems and the Russian invasion of Ukraine will taper off. One reason: NBC’s report that the Federal Reserve is eyeing “aggressive” action to curb inflation, with possible half-point rate hikes throughout the year and shrinking its $9 trillion stockpile of bonds.

What you can do

Wages are going up, but it’s because of labor shortages and the Great Resignation (with the quit rate hovering at 2.9% per month) – not inflation.

Mercer recommended considering:

1. Adjusting employee wages to be competitive according to industry and geographic region. The job market is driving wages up, especially for workers who are paid hourly. It warrants a more aggressive approach to ensuring that pay is competitive for all employees, including making adjustments outside of the traditional annual pay cycles.
2. Evaluating the impact of inflation on low wage workers. According to Mercer, one in three executives believe that delivering on good work standards, such as fair pay or worker protection, will deliver “the greatest ROI.” Lately, that’s been reflected in an emerging shift in approach to compensation setting for low wage workers. Do your organization’s starting wages require a boost – either overall or in certain regions? An alternative solution could be lump-sum awards to offset rising prices. For example, some companies have been considering stipends or allowances to help workers manage high gas prices.
3. More pay transparency. Employees don’t always understand how their pay is set. This could be a good time to educate them by sharing information on what the market pays for workers in their roles. This can help better manage employee pay expectations in a challenging market.