Author: Sarah Maximilian, Pictures: unsplash
The monthly inflation report is still something we need to get used to. While some took first steps in 2021, most businesses appear to be under pressure to evaluate how their employees' salaries would change during these turbulent times. I, for one, barely know any businesses that can sidestep this issue. Everyone seeks answers: employees, employers, unions, and works councils. As a result, we must decide how to handle the European region's 8–10% inflation rate in 2022.
What prevents companies from giving all employees 8% more money?
Compared to previous years, employees do the same work, but can afford less at the same salary. This hurts and forces many to make concessions - housing, food, mobility and consumption - everything is becoming more expensive. Companies are not exempt from this either. Costs are rising, caused not only by higher energy and material prices, but also as a result of supply bottlenecks and shortfalls. Not to forget higher debt amassed during the Corona years.
Well, to be able to pay employees more money, there has to be more money available. Only flourishing businesses boosting production and efficiency can afford to pay more. Borrowing capital and investing it, is an option, but how on earth do you save money with prices on the rise? And how can you boost up sales when you can’t deliver the goods, or your customers refuse to pay the higher prices?
So, why don't we just give everyone extra money right away?
Even if a company could afford to raise salaries for everyone by 8–10%, it would not solve the problems caused by inflation. At worst, it would further cement the current salary structure (with all its inconsistencies and flaws), imparing pay gaps and inequalities at the expense of internal fairness and balance. Besides, no one can predict how wages and salaries will evolve in the coming months and years. It may very well be that salaries will rise - for some groups and profiles they will rise, more than others. Once again, those with up-and-coming, future-oriented skills and experiences will benefit more than those whose jobs are easily available on the market, or can be easily automated. At the very least, it will make the imperfections of the present compensation structure more evident. Pay inequities and disparities would increase at the price of internal fairness and stability. Besides, who can confidently predict at this time whether the rate of inflation remains the same or drops to its prior average of 2% to 3% (Western Europe)?
The equation "inflation equals pay increase" is risky - our actions today are setting up expectations that we may not be able to meet in the future.
Consequently, in order to take actions today, employers must be clear about two things:
What can we afford right now? This requires transparency on what the company can pay, rather than what the company would allegedly have to pay.
Which employee group shall be prioritized? When we provide additional payments or salary increases to account for inflation, who should we target? Higher prices hit employees with lower salaries much harder, but how do we define the salary range that is considered low in the organization? Is it a matter of raising the minimum wage only, or do we have employee groups that are paid fairly well, however relatively to the internal salary bands might be considered lower paid employees? Are we connecting the effects of higher prices with factors specific to the work environment, e.g. the location of our office, our remote work policy, social aspects of our work population? For example, employees in urban areas might experience substantial losses despite a solid income? Or should we primarily safeguard employees in crucial functions instead?
How should we deal with market data?
Currently, market data isn't really helping us make sense of things. In times of high inflation, the market is extremely dynamic and the impact of this phase, become apparent in pay surveys only years later. Due to the lapse of time between gathering, analysis, and distribution in this fast-changing world, today’s data reflects decisions taken in the past.
If you happen to participate in online surveys or polls in Q3 2022, the expected budget for salary adjustments will likely not surprise you. May it be 5% or 7% anticipated increase in 2023. However, we are planning during uncertain times.
Little do we know, if companies will need to adjust their current predictions and budgets half-way through the next year.
Let’s face it: there are no standard solutions at this stage. Shall we raise all, or only some salaries? What about special benefits? Will we most likely see that discussions move from base salary increases, one time payments and cash elements to a review of the total compensation package: VSOPs, financial wellbeing benefits, cost expenses for remote work, all of that will be back on the table during this time. The fact is, we will only be able to understand the impact of today's inflation on market prices in a few years' time.
Salary increases or one-off payments. Which option is the best?
If the inflation rate is to be accounted for in the annual salary rounds, it might make sense to stagger them according to income groups. For instance, the lower income third may get 8%, the middle 6% and the top income third, 4%. Levels or grades, not income limits, are helpful in this case. The basic assumption is: the higher the grade or job level, the higher the salaries of the employees in these ranks. This streamlines the distribution of the total budget in the salary round. For those who have set up salary bands linked to levels or even more granular to specific jobs need to deal with ambiguous and already outdated market-data. Hence, if you predict that salaries will increase by 5% on average, you could apply these effects to the current salary ranges. Please note, however, that while the pay range swings upward, not all salaries increase by 5%. The salaries of employees who fall within the income range might actually raise by 5%, but this does not necessarily apply to the outliers and those you cause the aforementioned inconsistencies in the salary distribution.
On the other hand, whether you pay all employees an inflation lump-sum, or just one group, depends primarily on the employee structure. For smaller companies with more homogeneous employee groups, it certainly feels fair to consider everyone equally. For larger companies with very diverse jobs and a wide range of salaries, however, you will certainly encounter a group that is hit harder by the inflation than others.
Here, it's crucial to convey the one-time payment as a lump sum for inflation and to avoid combining it with other development initiatives. In most cases, treating all employees equally is often not feasible and defeats the purpose of inflation compensation. Being clear about this, is important. Communicating it to employees is even more so.
Is now the right time to be transparent and talk about compensation with your employees? Shot answers is yes, absolutely! If not now, then when?
For several years now, employees have been demanding more transparency. What previously was implemented mainly by progressive companies, discussing its own salary framework openly, is currently demanded from nearly every business as well.
The subject of inflation is no longer just discussed in the media, but in coffee shops, in employee meetings and among friends, as well. Companies need to be transparent today and unveil their pay model. They need to clarify how much of compensation is contingent on inflation, what assumptions the organization is making, how difficult (or not) it is for the company to generate income or cut expenses, and what steps are taken to promote and keep their employees. If companies were only to declare that salaries will increase at an average rate of 5%, the workforce would still not be able to understand how inflation affects this decision and how salaries and salary adjustments are distributed within the company.
A pay story is the company's own narrative in dealing with renumeration
A pay story is thus indispensable - the company's own narrative in dealing with renumeration, which often contains the message that salaries are in fact increasing even in difficult times. A pay story should also make clear in what manner the current system and processes are being adapted to the present environment. A pay story that elaborates on how the business plans to grow in the future. Do explain how you deal with the issue of inflation and also bring up what other benefits the company would like to offer. Maybe it will partly reimburse rising energy costs for employees who work from home. Or offer train tickets to get to work.
Nowadays, businesses not only need to boost pay, but also find solutions on how to help employees facing income losses due to rising costs. Those who deal proactively and openly with this issue, will undoubtedly reinforce the employee’s trust in the company. With a pay story, you avoid the negative chatter when employees are not being properly informed about the company's goals and strategies. During this time, being active and finding solutions (e.g., increasing salaries) that respect the high inflation is already expected by employees. Which also indicates that company’s actions will not lead to higher satisfaction in general. In the end, compensation is a hygiene factor, that company’s need to do right. However, your narrative can make a big difference. Employees want to feel that they are being listened to and want to follow and understand the decisions the company is making. Communicating openly and in comprehensible way is the north star at given times. The goal is therefore to prevent turmoil by taking a clear stand and stop rumors and gossip in their tracks. But even more so, sharing your pay story will make people feel that they are being respected and trusted.
Start drafting your pay story and check in with people in your organization if the message is clear and understood. Do not expect them to figure this out themselves. Most likely, your workforce is diverse, therefore approach your narrative in a way, that everyone is able to grasp your intention and your game plan.
Picture credits: Unsplash.com