Unprecedented Times, Tough Questions: How To Deal With Soaring Inflation When Reviewing Pay

As the cost of living rises, companies and the people who work for them are finding themselves navigating some seriously tricky conversations about compensation.

As companies take the new year as an opportunity to review salaries, the unavoidable reality of double-digit inflation will dominate many of these discussions. 

So, how can HR and employees navigate compensation in these unprecedented times? And how can we reconcile the short and long-term needs of the two groups?

As is often the case, the answers lie somewhere in the middle. By comparing the perspectives of both employees and the companies that employ them, we can strike a balance and weather the storm.

Historically High Inflation Rates

In the eurozone inflation hit 10.7 percent in November 2022, while in the UK it reached a 41-year-high of 11 percent in October. In the United States, inflation hit 8.6% at the end of May 2022 – the highest it’s been since 1981. 

So, should companies be raising salaries in response to these historical rates of inflation?

The well-versed, expected economist answer would be: no, salaries should never be increased to keep up with high inflation - in fact, doing so only leads to higher inflation in the long term! 

That said, many companies will be smart about this and refer to data from global salary budget and compensation planning surveys (like this one from our friends at Culpepper!) as a means of determining how much to raise salaries by.

These types of surveys provide global salary increase budget data for multiple countries and territories - covering topics like base salary increases, salary range structure adjustments, promotional increases, variable pay budgets, and salary budgeting practices.

What the results show is that things are rarely black and white. Whilst only 3% of European companies plan to boost salaries in line with inflation, budget surveys have shown that companies plan to increase their salaries by an average of 3.4% this year. This represents the biggest salary boost since 2008. 

So, to make wise, future-proofed decisions about inflation and compensation, the employee perspective -and their needs and behaviors -  must be considered too.

Struggling with Squeezed Salaries: The Employee’s Perspective

As inflation - and subsequently prices - rise, consumer’s buying power goes down. Suddenly, an employee's salary doesn’t allow them to buy the same goods and services as they did before. 

What was once disposable income becomes the money they spend on skyrocketing energy bills or higher prices at the supermarket checkouts.

For many employees, 2022 was the first time in their working lives that they’ve experienced the impact of high inflation. Naturally, a sudden decline in buying power causes frustration and concern.

It’s why, for some employees, a salary increase that doesn’t match inflation can actually feel like a pay cut. 

So, it’s easy to understand why employees overwhelmingly believe that companies have a responsibility to match wage increases to inflation. 

And if workers feel that they’re not being fairly compensated? They’re likely to be tempted to look for alternative employment that gives them more stability in this precarious economic climate. 

Long-Term Concerns: The Employer’s Perspective

From an organizational perspective, an employer’s compensation structure is grounded in the cost of labor, not the cost of living. 

So, while inflation and salary increases generally move in the same direction, they are fundamentally driven by different inputs. Inflation represents changes in the cost of a market basket of goods (such as groceries and fuel). 

Wages, on the other hand, are driven by changes to supply/demand for labor. This complex relationship can be shaped by demographic trends, labor participation rates, technological advances, and growth in productivity.

Historically, salary increases and inflation have never been in direct correlation. 

Let’s take the U.S. as an example: 1971 was the year of highest peacetime inflation on record at 13.3%. Yet, salary increases were significantly lower at around 8%. Conversely, in 2001, inflation was just 1.9% but salaries increased by 4%. 

Many employees receive some level of salary increase every year, and those increases compound over time. So, for many years, salary increases were actually higher than inflation.

In that context, another important thing to consider is this: pay rarely goes down. 

So, because wages are difficult to reduce if markets deteriorate, companies must be cautious about raising salaries before determining long-term implications.

The uncomfortable truth is, if salaries are increased to match soaring inflation, there’s a likelihood of pay cuts and layoffs will become necessary as inflation recedes.

So, How Can Companies Reconcile the Two Perspectives?

Whilst a knee-jerk reaction to rising inflation could be unwise, now is a great time for organizations to review and reinforce their pay philosophies and structures. 

The key is to think both short and long-term. Many analysts believe inflation already is peaking; others believe it will stick around for a while. 

Either way, by working to understand how inflation affects their employees, HR departments can respond to worker’s concerns and difficult questions about compensation. 

One of the best ways to do this? By being able to reassure employees that the company’s pay structure is grounded in a fair pay philosophy and objective, consistent job evaluation. 

How is gradar Helping Companies Navigate Compensation?

When it comes to fair salaries, consistency is king. Having an equitable pay structure that can be easily justified to employees will be HR’s best backup in difficult discussions about compensation in these unprecedented times. 

gradar helps companies to introduce fair wage structures that aid in the retention of talent, even as variables like inflation and markets inevitably change.

One of gradar’s key characteristics is a qualitative approach to job evaluation. By providing clear factor definitions and distinctive verbal level descriptions, the evaluation process is easily understandable for everybody involved and provides a high level of objectivity.

Even better, gradar’s compensation benchmarking feature allows organizations to compare their pay rates to those of similar jobs in other companies. This allows companies to ensure that their wage rates remain competitive, aiding them in and attracting and retaining top talent. 

Available in 15+ languages, gradar has been  implemented in organizations across the globe. If it sounds like gradar could help your business, get in touch with our support team today.