Turbulence Ahead: Will 2022 Break Compensation Budgets?

Going into 2022, workers' pay is all about supply and demand—and inflation. With more job openings than people looking for work and inflation at the highest level in three decades, topping 6 percent year-over-year in October, employers face pressure to increase salaries and hourly wages.  [Update: the consumer price index increased 6.8 percent year over year in November, the U.S. Bureau of Labor Statistics reported on Dec. 10.]

In this environment, pay is driving workers' decision to change jobs, according to a 2021 survey of 1,404 workers by software company Ceridian, showing that surveyed workers:

• Would consider leaving their current job for the right opportunity (36 percent).
• Are actively looking for a new job (24 percent).
  

Among the top drivers of this decision were workers' desire for:

• Higher salary and better benefits (49 percent).
  
• Greater flexibility, such as remote work and flexible hours (33 percent).

Persistent Trends

Although many HR executives will be glad to see the end of 2021, "the reality is that [these trends] don't have a start or stop date," said Catherine Hartmann, managing director of work and rewards at consultancy Willis Towers Watson in Irvine, Calif. "The pressure points on compensation will continue into 2022."

Many employers will have to acknowledge that cost per employee and overall fixed costs are likely to increase, she said. "It's hard to get around that."

In this environment, compensation budgets that just a few months ago projected increases of 3 percent to 3.3 percent for the year ahead are likely to be revisited and (if company finances are sufficient) revised upward. This is especially true because the percentage increases expected for 2022 were only slightly higher than the projections in years past when inflation was held in check and employers had access to a greater supply of talent.

"This is the most turbulent compensation environment I've seen in my 30-year career," said Tom McMullen, senior client partner in total rewards with Korn Ferry in Chicago. "Actual increases could be a full percentage point higher" than originally forecast, he believes.

Do What You Can

One way employers can keep compensation costs under control is to retain existing employees. "Employers need to up their game because there are not enough people to go around," McMullen said. To keep current talent, employers can create or fine-tune counteroffer programs; accelerate promotions for high-potential and key talent; and offer signing, retention and referral bonuses for a wider range of employees.

'This is the most turbulent compensation environment I've seen in my 30-year career.'
— Tom McMullen

Pressure on worker pay is not equal for all categories of jobs. Employers can look for ways to shift funds in compensation budgets to jobs that are particularly hard to fill and retain, ranging from front-line hourly positions to science, technology, engineering and math positions. For example, as more companies seek to manage supply chain and cybersecurity risks, pay for expertise in those areas has been soaring.

Other steps to manage pay structures include:

• Developing wider pay ranges for hard-to-fill jobs to give hiring managers greater latitude when making job offers.
  

• Gathering real-time information on the state of the market from internal and external recruiters. For specific jobs, it may be necessary to conduct salary surveys and market pricing analyses more frequently than the usual annual practice.

While working through challenges in the year ahead, hiring managers may need extra support in setting pay levels and dealing with a rapidly changing market. "Local managers have to figure it out, and some of them are struggling," McMullen said.

[Need real-time, HR-reported compensation reports? Check out the SHRM Compensation Data Center]

Pay for What You Need

Employers might have to ask hard questions about their needs, including whether managers have the agility, candor and communication skills necessary to lead the organization through a business environment transformed by the COVID-19 pandemic; the rise of hybrid onsite/remote-work models; and increased focus on diversity, equity and inclusion.

Fresh thinking could also lead to opportunities to redeploy existing talent. For example, if an employer is having difficulty finding talent for specific positions, it could increase the learning and development budget to give existing employees opportunities to move into a new role or expand their current role by adding and deepening their skills, Hartmann suggested. In these cases, employees could be eligible for a pay increase as the value of their role increases.

Look Beyond Pay

Money talks when it comes to recruiting new talent in this environment, particularly for lower-level jobs. However, benefits and workplace flexibility are also critical.

"People have more options for jobs, so they are more likely to compare company offerings and seek out more-attractive total compensation packages," said Tanya Jansen, co-founder of beqom, a compensation management software company in Nyon, Switzerland.

According to beqom's research, job candidates increasingly value child care and parental leave, flexibility in hours, hybrid-work policies, and opportunities to learn or improve certain skills. From there, employers can "decide if they will be in line with market pay or ahead, and if there are certain benefits they can add to make up for any pay gaps," Jansen said.

Revisiting Equity Compensation

A final consideration: Employers at publicly traded companies may need to rethink who is eligible for equity compensation and how quickly those awards vest, Hartmann noted. For example, employers could use stock grants to retain high-demand and high-potential employees and managers, even if they are not at a level that would traditionally be eligible for equity awards.

Employers could also expand the use of equity grants as part of a sign-on bonus to bring in particularly promising talent, she advised.

Joanne Sammer, a New Jersey-based business and financial writer, has written extensively on topics related to human resources and corporate governance.