Compensation During Inflation

It’s tough to find good people in this tight labour market. Once you’ve got them, you want to keep them. But what do you do when wage inflation means your new hires are demanding more than you pay your loyal long timers? What if your prices are already as high as you can charge? What if you give everyone a raise only to have the market crash under your feet?

It should come as no surprise that every company is experiencing some form of this challenge in today’s market. This provides:

1. Comfort – you’re not alone!
2. A solution – you don’t need to invent the wheel on this one.

Here are the five actions you should take when it comes to compensation in a period of inflation.

1. Review (or set) your compensation philosophy

A compensation philosophy sets the guidelines a company has decided to follow, explaining what they’re willing to pay for and why they’ve made these decisions. For example, do we want to pay at, above, or below market? What ratio of base to variable compensation is right for us? When considering variable compensation, what part should be allocated for team performance and what part for individual performance? In tough times, do we have everyone take a small pay decrease or is a round of layoffs more appropriate in our culture?

Even if you have a philosophy, it may not have considered what to do in times of rapid inflation. After all, it’s been 40 years since we’ve seen what we’re seeing today. Employees understand that we’ve all been caught off guard and get that you may need to consider your options. What employees aren’t prepared to deal with is dithering. They’re addicted to their food and shelter as we all are and want to know that their job will enable them to meet these commitments. Whatever plan you choose, it’s only fair to communicate it to the staff so they can make decisions and act accordingly.

Ideally, your compensation philosophy is a bit “weird”. Compensation is one of the main drivers people use to choose where they work and whether they stay there. A total rewards strategy that is markedly different from your competitors makes it easier for the right people to opt in and will repel those that don’t match your corporate culture.

2. Supply a “Total Rewards Statement”

The only information a typical company provides its staff to explain compensation is an annual T4. While this does its job reporting what a person earned over the course of the year, it’s an incomplete representation of the total rewards offered. Benefits packages, free coffee, flexible work hours, interesting projects, caring management…all of these tangible and intangible benefits come together to create a “total rewards” package. Companies are well served by highlighting these added “perks”. Not every office offers free snacks!

When managers review the Total Rewards Statement with their staff, they should highlight each of the rewards in turn, as well as the financial progress the individual has made over the previous few years. Someone hired at $60,000 that three years later earns $80,000 may have minimized the acceleration of pay. Further, the intangible rewards should be discussed to determine if they’re valued. If the free snacks aren’t valued, that’s some budget that could be put to other uses (including inflationary pay increases).

3. Give them a bonus

Raises are typically reserved for sustained performance improvements (or sustained increases in cost of living). When some economists are warning inflationary pressures are transient, it may make sense to offer a one-time cost of living offset instead of a raise. The employees should feel the company is treating them fairly, while the company can delay the decision for an across-the-board increase until the economic environment has stabilized.

4. Pay attention to the labour market

If wages are truly in an overheated boom, keep an eye on the market – you don’t want to end up paying more for talent due to outdated market intelligence. Resource-based economies are all too familiar with the inflationary effect a boom can have on their cost of labour – and in boom times they can afford to pay more. The problem becomes apparent in the down cycle when the revenues for resources no longer support the higher wages.

There is also the impact of low unemployment. Yes, good people are hard to find, but the talent market can shift quickly, and government employment statistics lag the market by months. As we teach in Bellrock Management Foundations you should always be recruiting for top talent. This allows you to nab a key strategic hire when they become available, but also provides great market intelligence on compensation rates in your industry. Pay close attention to the cycles.

5. Don’t forget price

It is entirely possible that you are charging as much as the market will bear for your goods and services. But! In an age of inflation, it’s possible that the usual price sensitivity of your customers has changed. A 1% increase in prices can lead to a 4% return on the bottom line (depending on gross margin). Perhaps that return can be invested in the people who are providing those goods and services – if not all of it, maybe a portion?

Companies with a regular strategic planning process have the built in ability to deal with inflationary pressure. Viewing compensation as an investment (not an expense) helps leaders to make decisions aligned with their corporate strategy and consistent with their employees’ expectations. Addressing inflation in the context of corporate values and a defined pay philosophy means that while everyone might not be happy with how much they’re making, they understand the decisions being made and feel they’re being treated fairly.

Bellrock offers business leaders a unique perspective on strategic challenges. We also translate that perspective into actionable plans that improve results and train managers on execution. Our purpose is to develop life-long relationships and raving fans. If you found this article valuable, don’t be stingy. Share