Total reward can feel like a moving target when you’re trying to factor inflation into the mix.
A five percent raise sounds nice during calmer economic times. When grocery bills and rent prices go up 10 percent in a year, though, that five percent raise isn’t enough for employees to keep up with their costs of living.
This creates a potential employee churn problem for employers. When people are worried their total reward package cannot keep pace with rising costs, they start searching for new opportunities.
For CHROs and reward managers, inflationary pressure means looking for ways to balance a total reward strategy that’s fair to employees and to the business itself.
Changing Your Salary Strategy Now Could Be Risky
When employees face rising cost-of-living pressures, the aspect of reward they tend to focus on is salary.
For the sake of employee retention, it might sound like a good idea to raise pay levels to match rates of inflation. But this could interfere with other strategic goals like making pay transparent, or closing wage gaps, or setting meaningful DEI goals, or positioning the organization as an employer of choice in a crowded talent market.
Further, there is a tendency among companies to imagine how reward adjustments would impact the most vulnerable workers. A 2022 survey from Salary.com found that just more than half of respondents had “adjusted their salary levels to reflect current market premiums,” which made hourly workers and non-management staff the biggest beneficiaries.
While there is nothing at all wrong with paying these folks more money, it can have unintended consequences. We see this also when businesses boost compensation for new hires in an effort to be competitive in the talent marketplace. This can cause pay compression, “when the pay of one or more employees is very close to the pay of more-experienced employees in the same job, or even those in higher-level jobs, including managerial positions,” Stephen Miller writes at SHRM.
One way to avoid the various knock-on effects of salary adjustments is to simply offer employees a one-time cost-of-living payment. Again, though, this can have unintended consequences, writes Scott Cullen, partner and head of reward consulting at KPMG in the UK.
“While these one-off payments will not impact the cost of any other reward elements and the employees will likely be grateful, we anticipate that the positive impact on engagement may not last long,” Cullen writes.
Taking a Broader View of Total Reward and Inflation
Aspects of your total reward are more resistant to inflationary pressures than salary.
Take bonuses and commissions. In theory, paying out “bonuses and commission should not cost a business anything,” writes the team at UK recruitment firm Copeland Select, because it’s the employees who generated that revenue in the first place.
But bonuses “can be fickle,” Monica McCoy, founder and CEO of Monica Motivates, tells UNLEASH. Employees cannot plan their personal budgets around these rewards. “What if, having worked hard all year, you suddenly fall ill with your bonus assessment just around the corner? What if you only recently joined the company?”
This is why it’s important to take a big picture perspective of total reward. Understanding what other benefits motivate employees can help you help them navigate tough economic times.
Ross Archer, director of public policy at the Association of International Certified Professional Accountants, sets out examples of what some U.S. companies did in 2022 to bolster their labor-retention strategies:
- Amazon invested in its mentoring program.
- Hilton and Marriott introduced earned-wage access programs.
- JCPenney expanded its child care benefits program.
“[W]e typically see the best reward programs in organizations being the ones that are most effectively implemented as opposed to those with an elegant strategy and design,” Tom McMullen and Brian Reidy of Korn Ferry Total Rewards write. “Great implementation includes leader engagement and alignment, providing managers with support capabilities and well thought out and direct communications.”
Budgeting For Additional Reward Spend
If you need to make the case to your executive team for a bigger total reward budget, the team at the Reward & Employee Benefits Association has some helpful tips:
- Get data from official consumer price indices to demonstrate how local inflationary pressures are eating into the rewards of your team members, wherever they are.
- Use your financial data to model a variety of reward scenarios. Consider questions such as whether all employees should see the same proportional raise, whether performance should be a factor, and how all of this impacts your equal pay efforts.
The Big Picture
Fairness and flexibility are the two keywords to keep in mind as you revise your total reward strategy.
Flexibility can simply mean allowing employees to choose their individual reward packages. This puts them in a position to navigate the inflationary pressures impacting their lives as they see fit. Examples of what this might look like could include:
- Allowing employees to scale up or down their retirement contributions.
- Giving people earned-wage access.
- Hybrid work arrangements that give people a way to lower their commuting costs.
And this is where fairness comes into play, especially in the context of employee retention. “Whether employees are being paid fairly or not, their perception of the matter influences their decision to stay or go,” writes Teresa Zuech, then public relations manager at Gartner and now senior manager at Golin.
Zuech tells the story of one company that piloted a pay transparency program that showed employees how their reward stacked up against what they would receive elsewhere. “The company plotted employees’ base pay, total cash compensation and total direct compensation against a competitive range for their position,” she writes. “This approach helps employees understand how their compensation compares to the market and nullifies assumptions propagated by external sources.”
By being fair and transparent about total reward, you give your company a reliable strategy for navigating employee turnover during an inflationary economy. Pair this with a personalized reward program to build in the flexibility necessary to make this strategy fair for both employees and the organization.
Images used under license from Shutterstock.com.