The latest figures show that inflation continues to escalate. The consumer price index (CPI) had risen 7.9 percent in February from a year earlier and was up 7.5 percent in January year over year.
Higher inflation means the buying power of workers' take-home pay is shrinking. Real (inflation adjusted) average hourly earnings fell 2.7 percent, seasonally adjusted, from March 2021 to March 2022, the BLS separately reported on April 12.
For more on how inflation is affecting employee pay budgets, see these 2022 SHRM Online articles:
Due to high wage growth and inflation since April 2021, when The Conference Board conducted its 2021 Salary Increase Budget Survey, the organization decided to field the survey again. It did so from Nov. 8 to Nov. 19, 2021, with responses from 240 U.S. employers, more than half of which are companies with more than 10,000 workers.
Among the findings from the November survey:
The projections for 2022 salary increase budgets jumped almost a full percentage point, from 3 percent in April to 3.9 in November.
Looking back at 2021, the average salary increase budget for this year jumped from 2.6 percent in the April survey to 3 percent in November.
Future Wage Growth to Top 4%
"It is likely that severe labor shortages will continue through 2022," wrote Gad Levanon, vice president of labor markets at The Conference Board. "During that time, overall wage growth is likely to remain well above 4 percent. Wages for new hires and workers in blue-collar and manual services jobs will grow faster than average."
At the same time, he noted, "there are no signs of inflation slowing down, and it may remain elevated in the coming months, increasing the need for cost-of-living adjustments."
He warned, "A wage-price spiral—where higher prices and rising wages feed each other, leading to faster increases in both—may already be in the works."
In the chart below, "salary increase budgets" refers to the pool of money an organization dedicates to salary increases for the coming year. It is strongly related to the typical raise a worker would receive in a given year, as represented by a percentage of current payroll. "Salary structure movements" are adjustments to the minimums, midpoints and maximums of an organization's pay ranges to account for changes in the cost of living and salary markets within a given industry.
Pay Compression Issues
While overall wage growth dramatically accelerated during the past 6-8 months, Levanon noted, "that increase is especially strong for workers under the age of 25 and for people who switched jobs in the past year. This suggests that much of the wage acceleration has been among workers who were recently hired."
Faster wage growth of new hires, however, creates pay compression, which then puts further pressure on employers to raise pay across the board.
"When more experienced workers feel that their pay advantage is no longer significant, they may seek new jobs in the tight labor market, which leads to high labor turnover of more experienced workers," Levanon explained. "Employers faced with extensive departures of experienced workers will raise wages faster for current employees in order to maintain an effective workforce."
Pay compression further pressures employers to raise pay across the board.
Rising Pay Still Trails Inflation
HR consultancy Mercer also expects that the average amount of employee raises in 2022 will be higher than assumed earlier this year but doesn't expect salary increase budgets to rise quite as high as The Conference Board is forecasting—at least not yet.
Mercer's researchers found that as of October 2021:
Merit budgets for discretionary annual increases to base pay, typically for employee performance, are projected at 3.2 percent for 2022.Total increase budgets, which include merit along with other types of base pay increases such as promotion pay increases, are projected at 3.5 percent. These numbers are up slightly from the 2022 projections of 3 percent and 3.3 percent, respectively, according to Mercer's August survey, and they represent a gain over the actual 2021 budgets of 2.8 percent for merit and 3 percent for total increases.
Variable-pay incentive bonuses, which are one-time cash payouts that do not affect base pay, are projected to significantly increase compared to last year, with 1 in 4 employers saying they will have an overall bonus pool more than 10 percent higher than last year.
The majority of employers set compensation wages based on cost of labor—the market rate for a job—versus cost of living. Because of this, there isn't a direct relationship between annual merit budgets and inflation, Mercer said.
Over the last 10 years, inflation has typically hovered between 1 percent and 2 percent, while merit budget increases have been between 2 percent and 3 percent, the consultancy noted. While the current labor market is driving some increases in pay, employers are concerned about economic uncertainty "and therefore looking to other vehicles such as incentive pay to reward and retain workers in this tight labor market," the researchers said.
"The reality is that most employees would have no trouble finding a new role, and likely command a premium for job switching," Mercer reported.
Delaying Pay Budget Decisions
As 2021 draws to a close, merit increase projections for 2022 should still be considered preliminary, said LaCinda Glover, a senior total rewards consultant at Mercer.
With the economic uncertainty posed by COVID-19 and its variants, rising quit rates and resurgent inflation, "employers are likely to defer [salary budget increase] decisions until the latest possible date, just as we saw in early stages of the pandemic," she noted.
"About one in five employers have merit budgets that have been approved by leadership and about 50 percent indicate they're still in preliminary stages of collecting information and figuring out what they're going to do," Glover said.
According to Mercer's report, "the majority of employers do not provide increases until March or April ... so the reality is that these numbers may still change."
Off-Cycle Increases and Higher Minimum Wages
Merit budgets do not capture all types of pay increases, Glover noted. Off-cycle market-based raises generally occur outside of the merit process and have become more frequent "as employers react to the labor market and try to keep pace."
Off-cycle pay adjustments are often off-budget as well, as only about one in four organizations report having budgeted for them, Glover said, and those budgets are typically around 0.5 percent to 1 percent of pay.
Relatedly, more organizations are trying to hire and keep hourly workers by raising minimum wages. Mercer found that 37 percent of employers increased their minimum wage this year and another 5 percent said they were considering it before the end of the year.
Wages aren't likely to stabilize "until we see significant changes in the quit rate and the number of job openings," Glover predicted.
Year-over-year inflation exceeds 6 percent for the first time in decades, she noted. "Layer on top of this the media coverage surrounding compensation, and employee expectations are near an all-time high."
Pay Planning Tips
Lauren Mason, senior principal in Mercer's career business division, shared three recommendations for employers to consider during this year's compensation planning period:
Prioritize hourly pay
"With unprecedented levels of churn in the labor market, wage growth at record pace and increasing external scrutiny, now is the time to focus on hourly pay strategies," Mason advised.
Consider a segmented approach
Ensure budget dollars "are focused on addressing gaps in competitiveness and not being spread like peanut butter," Mason said. "Consider a segmented approach by offering higher wages to both new joiners and high-performing current employees in critical business segments," as well as those whose pay is below market rates.
Keep in mind the employee experience
Employees have heightened expectations around pay, so equip leaders with the resources to communicate pay decisions effectively, Mason recommended.
Aside from pay, she noted, "in many cases it's when the broader employee experience falls short that employees will start to shop their options. Employees are feeling exhausted and burned out from the pandemic. Employers need to examine ways to support their employees' unmet needs, deliver more compelling jobs and create more flexible work environments."
Empsight Revises 2022 Salary Budget Forecast
Compensation survey and consulting firm Empsight's Spot Survey of 2022 Salary Budget Forecasts & Retention Practices reports responses from 136 Fortune 500 and large multinational companies surveyed between Nov. 15 and Dec. 6, 2021. The projected increases for 2022 were consistently higher than in the firm's midyear 2021 survey.
Forecasted Merit Increases The table below summarizes forecasted merit increases, excluding zero increases:
Overall 2022 forecast
Source: Empsight. Note: Unlike the mathematical average, the median is the middle value after listing expected budget increases in successive order. Outliers, or extreme values on either the high or low end, have the bigger effect on the average and less on the median.
Forecasted Total Salary Increases The table below summarizes forecasted total salary increases (merit + promotions + special adjustments). This table only reports on companies that provided forecasted promotions and/or special adjustments in addition to forecasted merit budgets.
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