Compensation planning to help offset inflation and retain employees

On the heels of the pandemic and into the highest inflation rate in 40 years, compensation planning for attraction and retention is perhaps more challenging than it’s ever been. As we move towards the final quarter of 2022, employers are thinking about increased budgets for the coming year – and many are implementing off-cycle raises. Whatever your approach, keep in mind that, while it’s important to consider inflation, given its fluctuating nature, it should only be one factor when planning long term changes.

Salary Increase projections for 2023

Salary increases don’t typically directly align with the inflation rate (as further discussed below) and this is reflected in 2023 salary projections. While inflation currently sits at about 7%, salary increase projections are just over half that. Based on the average of five firms gathering compensation data (Normandin Beaudry, Mercer, Payscale, LifeWorks, and Eckler), projected increases to Canadian salaries in 2023 are expected to be approximately 3.8%. With Eckler’s survey projecting an average of 4.2%, it is the highest anticipated increase budget in 20 years.

This data is reflected in the US by WTW, WorldatWork, and – albeit slightly higher at an average of 4.1%.

Despite the average, as found by Normandin Beaudry, at least one out of every ten employers plan to provide increases greater than 5%, some as high as 20%.

By industry, organizations in the IT sector (according to Normandin Beaudry, LifeWorks & Eckler) are among those anticipating higher than average increases (between 4.2% and 5.8%), in large part due to the labour shortage and competition for talent. As noted by Eckler, this is followed by membership organizations/professional associations (5.3%), media & telecommunications (5.1%), and construction (5.1%).

Industries predicting the lowest increases (per LifeWorks and Eckler) are education (2.5%), health care (2.7%), public administration (2.9%), and utilities (3%).

By workforce size, businesses with fewer employees are planning higher increases than those with more employees. Specifically, those with less than 50 employees are targeting 4.5% and those with between 50 and 200 are targeting 4%.

Where location is concerned, Mercer’s survey found that employers in Montreal are anticipating the highest increases at 4.5%, followed by Edmonton at 4.3%. LifeWork’s survey found that the highest increases would be in Manitoba (4.8%), with (according to both LifeWorks and Eckler) BC anticipating an average of 4.1% and Alberta anticipating 3.7%.

Finally, Robert Half’s survey found that 42% of employers are offering higher starting salaries and 57% of professional employees feel they have the upper edge when it comes to compensation package negotiations.

Should salary increase projections rise with inflation?

While it’s currently unknown whether employers will target higher increases if inflation continues to rise, Tiff Macklem, Bank of Canada’s Governor, warns against “directly building inflation into longer-term contracts”. As he explains, doing so “creates a self-perpetuating cycle” where increased wages result in higher costs to consumers, who, in turn, want higher wages as a result. While the issue is very real at the moment, as Macklem further notes, “… you can be confident that inflation will come down.”

How can employers help offset inflation and retain employees?

While providing a significant increase that endures beyond inflation may not be a good idea, employers need to retain their people. And while not every employer can, will, or should provide significant increases, many are. Compound this with ADP survey data indicating that 88% of employees would take another position for more money, and that compensation would be the leading factor in their decision. That’s a strikingly different message than we were receiving a few years ago!

Many employers (34%, compared to 19% in March of 2022, according to Mercer) are currently implementing ad-hoc off-cycle increases in order to help retain employees. While inflation has only been specifically noted by 19% as the reason, 85% are citing retention, 71% market adjustments, 60% counter offers, and 51% competitive pressure (all of which may be strongly influenced by inflation). Regardless of the impetus, however, (and as we discussed in last year’s post) it’s always important to consider your overall compensation philosophy – i.e., the guiding principles that drive compensation decisions within your organization. Unless your wages are clearly below market and what makes sense for your industry, performance/skill/development potential, internal equity, and total compensation should still all be considered.

What are the alternatives to increases?

While increases may be unavoidable to retain employees, as outlined above and as we discussed in a previous post, there are many other forms of compensation to consider. Appreciating that your people don’t all want and need the same thing, consider aligning rewards creatively and individually. Among other options, these may include:  

  • One-time bonuses, including signing and “stay” bonuses
  • Offering more flexibility and remote work
  • More time off (e.g., an extra week of vacation, unlimited PTO, moving to a 4-day work week)
  • Flexible health and wellness benefits that also focus on lifestyle
  • Allowances and stipends for remote offices and childcare stipends
  • Education support (funding and time off)

Regardless of whether you plan to implement inflation-based or related increases, how much, and/or whether you look at alternatives, start with your compensation philosophy and ‘why’: why you want/need to do so, and what you hope to achieve. That allows you to formulate the ‘what’ and ‘how.’

Jouta’s HR Consultants can help you review, creatively structure, and plan your compensation practices.