Beginning in March 2020 and stretching into 2021, employers made drastic changes to employee pay as business dried up and uncertainty reigned.
A survey of 2,800 senior managers at U.S. companies, conducted by staffing firm Robert Half during the second half of 2020, found that 57 percent of respondents had suspended salary increases as a result of the COVID-19 pandemic. As the situation settled and companies began to feel more confident about their prospects, they reconsidered:
- 27 percent said their companies would provide salary increases by the end of 2020.
- 43 percent expected to raise pay during the first half of 2021.
Looking ahead to 2022, early data from The Conference Board found that companies are projecting median salary increases of 3 percent for all categories of employees, which has been the trend for more than 10 years.
Will those increases be enough, however, given the much tighter than anticipated labor supply?
Temporary or Long Term?
After living through the stress of the pandemic, many workers are reassessing what they want from their lives. That includes what they do for a living and where and for whom they do it. As a result, employers that previously had little trouble attracting or retaining talent are struggling to deal with turnover and to find the right employees to fill vacancies.
Even companies that have historically taken very conservative positions on employee pay are not waiting until 2022 to act. "Companies are doing everything they can to be proactive," said Jason Adwin, senior vice president and national compensation and career strategies leader at consulting firm Segal in New York. "There are jobs open in the marketplace and not enough people to fill them."
To deal with this situation, some employers are giving off-cycle merit increases and ad hoc bonuses, especially if employees missed out on those payouts during 2020. "These employers may be giving a 2 percent to 3 percent raise in 2021 as a stop-gap measure, while also planning increases in 2022" as they would in any other year, Adwin said.
But what about the longer term?
If the current scarcity in the labor market is a temporary reaction to post-pandemic reopening and economic activity rather than a long-term trend, an employer that increases compensation budgets could find that it increased its fixed costs without ensuring an acceptable return on that spending.
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Talent scarcity is not a new development; that scarcity, however, is now more widespread. "What is different from pre-pandemic dynamics is this also includes entry-level, hourly-paid employees," said Catherine Hartmann, North America rewards practice leader at consultancy Willis Towers Watson in Irvine, Calif.
By focusing pay increases in areas where the demand for talent outstrips supply the most, employers can make sure they are targeting the right areas.
Hartmann recommended targeting compensation spending for three specific categories of jobs, most of which are filled by workers who are paid hourly and key professionals:
- Jobs that are difficult to fill or have high turnover.
- Jobs that are necessary to achieve business results.
- Jobs whose compensation has experienced considerable inflation in market rates.
For example, the rise of remote work has created an array of career options for higher-skilled, professional employees. To retain these workers, employers are "bringing back the use of retention bonuses and in some instances midyear salary adjustments," Hartmann said. Employers concerned about increasing fixed costs can also use one-time payouts such as special bonus awards or equity payments.
In addition to raising pay levels for new and existing hourly workers, Hartmann noted that some companies are providing time- or skill-based pay increases at specific intervals, such as every three or six months throughout the first two years on the job. When making this shift to more frequent pay increases for hourly workers, companies may also need to consider pay compression issues and the need to raise pay for higher-level positions within the same career path, she said.
[Related SHRM article: Inflation's Return Will Affect Compensation]
Cleaning Up Compensation
Given the labor market challenges, employers may have to pay higher wages ad hoc to make up for shortcomings in their compensation structure.
For instance, employers may need to pay for competitive and critical jobs at the 60th percentile instead of at the median. Similarly, they should ensure that their market intelligence is current and that how they price jobs is appropriate for this environment. "Employers need more real-time information rather than year-old information," Adwin said.
For those in lower-paid jobs, a 10 percent or 20 percent pay increase can change a worker's standard of living significantly for the better. But employer-provided benefits can be just as important. The pandemic, for instance, caused many employees to realize the importance of reliable child care. Employers that provide child care support could have an edge when it comes to recruiting employees.
Finally, take a fresh look at how pay is managed at every organizational level. "This environment can provide a good opportunity to clean up poor compensation processes that can impact how you allocate scarce dollars," said Tom McMullen, rewards expertise leader with consultancy Korn Ferry in Chicago. "Problems can arise when there is too much management discretion in compensation decision-making."
Joanne Sammer is a New Jersey-based business and financial writer.