Highest Pay Increases in Years Won't Match Inflation

Employee demands are driving changes in compensation strategy as employers respond to labor shortages and surging inflation, new research shows.

Pay data and software firm Payscale's 2022 Compensation Best Practices Report reveals that 85 percent of organizations are concerned about rising inflation eroding the value of pay increases.

The survey gathered responses from management-level decision-makers at 5,578 organizations, mostly based in North America, from November 2021 to January 2022.

"When it comes to pay, employers are scrambling to figure out what to offer new hires and how to structure salary increases to retain their current workforce," said Shelly Holt, chief people officer at Payscale. "As a result, compensation planning has never been more important to get right."

Forty-four percent of organizations plan to give pay increases higher than 3 percent this year, up from the 33 percent of organizations that did so in 2019, the survey showed. Planned pay raises, however, are unlikely to keep up with inflation, with the real value of wages on a steady decline when measured against rising prices.

In January 2022, inflation was 7.5 percent higher compared to a year earlier—a 40-year high. The unprecedented jump in inflation rates has 85 percent of organizations worried that planned 2022 pay increases won't be enough. At the same time, 76 percent of organizations faced labor shortages or difficulty attracting talent in 2021, and 49 percent said that voluntary turnover had increased compared to previous years.

The survey also highlights which benefits have become more common, such as:

• A 25 percent increase for remote-work options (now being offered by 65 percent of surveyed employers).
  

• An 8.3 percent increase in work-from-home stipends (offered by 15 percent).
  

• A 7.7 percent increase for flex-time options (offered by 37 percent).
  

• A 7 percent increase in mental health or total wellness programs (offered by 66 percent).

In addition, 40 percent of organizations said they were interested in location-based pay strategies with geographic differentials to determine pay for widely distributed workforces.

Pay Transparency

Another recent survey reveals that employees see a pervasive lack of pay transparency and pay equity at their organizations.

A pulse survey by Salary.com shows that among 561 employees from organizations across the U.S., surveyed last December:

• Only 23 percent of workers said their employer is transparent about how people are paid in their organization and that it is OK to ask questions about their salary.
  

• Almost half (46 percent) do not think they are paid fairly compared to people in the same role at other companies.
  

• Over a third (37 percent) do not think they are paid fairly compared to their internal colleagues.
  

"There is an abundant lack of pay transparency in corporate America," said David Turetsky, vice president of consulting at Salary.com, a provider of compensation market data, software and analytics. "When we surveyed HR professionals in the fall of 2021, only 35 percent had established a pay philosophy that supports pay transparency. The pressure is on for organizations to pull back the curtain on pay, educating managers on their prevailing pay philosophy and how to communicate it."

"Salary is often used as a tool to attract and retain talent, and pay transparency can do the same," said Tanya Jansen, co-founder of beqom, a compensation management software company.

"Employers making a conscious and transparent effort to clarify the factors that go into determining salary ranges will help their staff feel more secure about their pay in the long run," Jansen said. With a dispersed workforce, these efforts include "explaining how location and remote work factor into what employers pay employees."

Focus on Pay Equity

Sixty-six percent of organizations surveyed by Payscale said that pay equity analysis was among their planned initiatives in 2022—a 20 percent increase over the previous year. In addition, 52 percent said they plan to conduct a gender- or race-based pay equity analysis specifically—the first time the majority of survey respondents have said they will do so in the 13-year history of Payscale's annual survey.

"Workers are more focused than ever on pay equity, with an increased number of organizations rising to the occasion to get pay right," said Ruth Thomas, pay equity strategist at Payscale. "It's not just about pay raises; employees are demanding equal pay for equal work, and employers must consider this when restructuring their compensation strategies or risk employees seeking new opportunities."

In Salary.com's survey, one-third of respondents think their organization's pay practices support efforts to improve diversity, equity and inclusion (DE&I), while 29 percent do not and 38 percent didn't know.

"When assessing pay equity, HR professionals need to incorporate internal data and external market data for comparable work into the equation to solve for internal pay gaps," Turetsky said. "Once that work is done, they can establish a consistent methodology for performance reviews that will serve to maintain the pay equity balance throughout an employee's tenure."

Compensation "is intrinsically tied to an organization's culture," Turetsky added. "If you don't establish fair and transparent pay practices that support DE&I, and don't clearly communicate those practices, you'll have a hard time convincing employees your DE&I efforts are more than just window dressing."

Related SHRM Articles:

As Inflation Hits 8.5%, Workers Expect Bigger Raises, SHRM Online, April 2022

Salary Budget Growth of 5% Most Common Increase in New Survey, SHRM Online, April 2022

Turbulence Ahead: Will 2022 Break Compensation Budgets?, SHRM Online, December 2021

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