Inflation is now at a 40-year high, which means that most business leaders have little to no relevant know-how to guide them through. It’s hard for both CEOs and specialists to make sense of whether the current economic conditions are the result of a suppressed post-pandemic demand and/or of a new reality. Nonetheless, the latest statistics show that inflation continues to increase. Higher inflation means that the buying power of salaries is effectively shrinking at the same rate of inflation.
And while inflation and salary increases generally move in the same direction, they are driven by different inputs. Inflation represents changes in the cost of a market basket of goods such as food and fuel. Salaries, in contrast, are mostly driven by changes to supply/demand for labour which can be generated by various factors such as demographic trends, labour participation rates, technological advances and growth in productivity.
Fact is, that talent scarcity will favour salary budgets to trail inflation. Case in point, EU and U.S labour statistics reported an above 7% increase in the Consumer Price Index before seasonal adjustment over the last 12 months. They also reported that the unemployment rate dropped much closer to the pre-pandemic levels. Various surveys of EU and U.S. companies are discovering that companies are budgeting an average salary increase of more than 3% in 2022. This is about half the current average inflation rate – but a substantial rise from the historical average.
Therefore, as labour markets tighten and inflation rises across the globe, salary budgets will be moving above and beyond prior years. Increased salary budgets only make it more critical for companies to have a clear strategy for awarding pay increases as effectively as possible, highlighting critical employees and key jobs, and differentiating those for performance. This is a list of things that we need to keep in mind as we move ahead with these changes:
- Wages are sticky meaning they tend not to go down unless significant structural issues are present. Because wages are difficult to reduce if markets deteriorate, companies are slow to raise wages before determining long-term implications. Employers need to evaluate long-term upward or downward trends before increasing salaries across the board.
- Pre-pandemic salary budgets already began to reflect on the labour market demographic changes prior to the pandemic. This demographic change was initiated in developed labour markets by the reduced talent availability at both leadership and entry levels.
- During Covid, employee benefits and remuneration in particular industries’ have been initiated to attract new workers. Healthcare, life sciences, technology and supply chain companies have seen payroll increases for key professionals. These are captured in the current budgets and they reflect real payroll increases in those particular employers.
- Companies now are investing in flexible employee programs and culture to supplement fixed pay. They utilize Ad-hoc resources to manage multiple volatile business cycles such as the Great Recession of 2008-10 and the Covid of 2020-22 therefore avoiding payroll increases.
Smart business leaders recognize that it is hard to survive without key resources. This is why they make every effort to be agile when faced with unpredictable events such as the events that continue to unfold this year. This is why they should offer more flexible hours, bonus, stock and employee benefit plans that strive to build culture and loyalty. They should also aim to balance short- and long-term requirements – quickly and effectively communicate with their employees – to maintain great places to work in an increasingly intricate business environment.