Organizations generally set their salary increase budgets in the fourth quarter, or earlier, of each year for the following year, e.g., 2021 for 2022. In 2021, salary increase budgets were projected to be between 3% and 3.2%. However, with the rising rates of inflation, employers are currently rethinking their 2022 salary increase budgets.
What we know as of the writing of this article:
- Consumer prices rose seven percent year over year in December 2021, the largest 12-month increase in nearly 40 years, as reported by the U.S. Bureau of Labor Statistics (BLS) reporting on January 12, 2022 (https://www.bls.gov/news.release/pdf/cpi.pdf).
- In addition, according to the BLS, real average hourly earnings fell 2.4 percent, seasonally adjusted, from December 2020 to December 2021.
- The Producer Price Index (PPI), the key leading indicator for the prices that consumers eventually pay, rose 9.7 percent for the 12-months ended in December, up from 9.6 percent year-to-year increase in November and an 8.8 percent increase in October.
- Wages generally do not increase at the same rate as inflation.
First, let’s define salary increase budget. Salary increase budget refers to the pool of money an organization dedicates to salary increases for the coming year. It generally is related to the typical raise that an employee would receive in a given year, as represented by a percentage of current payroll. Salary increase budgets, differ from salary structure movements, which are adjustments to the minimums, midpoints, and maximums of an organization’s pay ranges or pay grades, to account for changes in competitive market rates within a given industry. The pool of money in a salary increase budget is generally allotted for merit increases, promotions, market equity adjustments, cost-of-living increases, etc.
Current projections for 2022 show that salary increase budgets will be at the highest rate since 2008. The Conference Board executives, a membership and research organization for large businesses, now estimates that salary increase budgets will increase for 2022 to 3.9 percent, from recent findings in their November survey (https://www.conference-board.org/blog/labor-markets/2022-salary-increase-budgets ). Gad Levanon, Vice President of Labor Markets at The Conference Board stated, “It is likely that several labor shortages will continue through 2022 and during that time, overall wage growth is likely to remain well above four percent. Wages for new hires and workers in blue collar and manual services jobs will grow faster than average.” At the same time, he warned that “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.” Levanon, also warned that “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.”
HR consultancy group, Mercer, agrees that salary increase budgets for 2022 will be higher. However, they are projecting that the increase will be somewhere around 3.5 percent, an increase from the projected 3 percent and 3.3 percent, according to their August survey (https://mercer.us/our-thinking/career/compensation-is-going-up-but-is-it-enough.html). Mercer also found that 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 one in four employers saying they will have an overall bonus pool more than ten percent higher than last year. Mercer also reported that employers set compensation wages based on the cost of labor, or the market rate for the job, versus cost-of-living, so because of this there is not a direct relationship between annual merit budgets and inflation.
In order to hire workers during the current labor shortage, employers are finding that they are having to pay new hires, or new employees higher wages creating wage compression within an organization. This means that the gap in wages between new hires and tenured or higher-ranking current employees is narrowed. New hire compression occurs when new hires are paid at or above the wages of current more experienced employees in the same jobs. When current employees feel that their wages are no longer significant, they may leave an organization to seek higher wages someplace else. This puts a greater pressure on employers to raise the wages of their current trained workforce in order to retain those employees and to eliminate wage compression issues. So, employers are encouraged to make pay equity adjustments for current more experienced employees when new hire compression occurs in order to help retain these workers. This automatically puts stress on the salary increase budget assigned by organizations for the year.
Will larger salary increase budgets that produce higher pay increases for employees be enough in 2022? Organizations are going to have to pay higher wages, but may also have to take a broader approach to help attract, motivate, and retain workers. Additional offerings to include: sign-on bonuses, retention bonuses, longevity pay, stock awards, enhanced recognition programs, enhanced career development and learning opportunities, robust tuition reimbursement programs, incentive opportunities related to job tasks and goals, year end bonuses, and more robust benefits in general, are all areas where employers may be able to aid in attracting, motivating and retaining employees.
For additional information on salary budget increases, please contact us at www.NewFocusHR.com.
Written By: Kristen Deutsch, M.B.A., CCP