- Merit increase budgets rising. A new WorldatWork pulse poll finds organizations are beefing up their 2022 merit increase budgets to accommodate talent amid a tight labor market.
- Going beyond compensation. Although pay is a critical factor, employers should also look at other rewards to recruit and retain talent.
- Addressing employee pay increase requests. Organizations should take a tactful approach in responding to employees who request a larger pay increase than their previously planned merit increases.
- There are potential ramifications. If employees begin receiving better pay offers elsewhere, there's a risk of demotivation and lack of engagement permeating within the organization's workforce.
In response to today’s tight labor market, more companies are looking at boosting pay this year.
WorldatWork’s January 2022 “Salary Budget Quick Poll” revealed that organizations are increasing their previously planned salary budgets to address the competitive labor market and inflation. The poll, which had more than 200 compensation professional participants, reported an average salary budget increase of 4.0% and a 5.0% median. The WorldatWork “2021-2022 Salary Budget Survey,” which was released in August 2021, projected 3.3% average and 3.0% median for 2022 overall salary budget increases. The same study stated an anticipated 2.9% average and 3.0% median budgeted merit increases for 2022.
This month, WorldatWork’s “Salary Budget Follow-up Pulse Poll” collected more than 250 responses from compensation professionals representing organizations of different sizes and across multiple industries, indicating an average 2022 merit increase of 3.7% and 3.5% median, significantly above predictions just six months ago.
The poll also found that when budgeting for adjustments or other increases, 67% of respondents said those are applied as a market/competitive adjustment.
Kevin O’Connell, director of total rewards and HR operations for Samsung Semiconductor, shared that the company doubled their normal salary adjustment budget for 2022, in addition to establishing a competitive merit increase budget.
“We increased our adjustment budget to address internal equity concerns caused by the Great Resignation, as it has become harder and more expensive to recruit people into the organization,” O’Connell said. “I still fundamentally believe in basing increase budgets on labor cost changes, but I also think that as wages rise, the cost of goods and services will rise as well so there will probably be lagging wage inflation as the year progresses, and if we take no exceptional action, we could fall behind.”
O’Connell isn’t alone.
A Willis Towers Watson (WTW) survey of 1,004 U.S. companies, conducted during October and November 2021, found nearly one in three respondents (32%) saying their organization increased their salary increase projections from earlier in the year. Companies are now budgeting an overall average increase of 3.4% in 2022, compared with the average 3.0% increase they had budgeted in June 2021. Companies gave employees an average pay increase of 2.8% in 2021.
According to the survey, nearly three in four respondents (74%) cited the tight labor market for increasing their budgets from prior projections, while only one-third cited anticipated stronger financial results (34%) and inflation or the rising cost of supplies (31%).
Daniel Harding, Plug Power’s director of global total rewards, said companies should look at their overall rewards philosophy, not just their base pay, when strategizing pay increases.
“There are many different levers involved,” he said. “Compensation is not one size fits all; it’s a package.”
Michaela Leo, Ipsen’s head of compensation and benefits, North America, said that pay is a critical factor, of course, but employers should also look at other rewards to recruit and retain talent.
“Benefits are becoming increasingly important and can be key differentiators. Culture, including recognition, is another key factor,” she said.
O’Connell said they use sign-on bonuses regularly to help close offers to prospective employees, and they are doing more and more one-off retention bonuses.
“We plan to expand eligibility for our long-term incentive plan to make us more competitive and to improve long-term retention,” he said.
Employees Asking for Raises
On top of the various market dynamics, employees who might feel entitled to a larger merit increase than what the organization has previously planned for adds a wrinkle for employers to deal with during this time of year.
This could put some organizations in a predicament, as the data indicates many merit increase budgets are already skewing much higher than normal. If this scenario arises, O’Connell said he would spend time hearing the employee out to understand their perspective and concerns.
“If the employee is off the mark, I would explain how that is,” he said. “I would explain that there are a wide range of salaries paid for any given job and that our range midpoints are pegged to the market (“the going rate”), and that this is our target pay level for people who are fully qualified for and fully performing the role.
“I would further explain that our pay range is wide, so that it can accommodate employees who are new to or still learning in the role or maybe not fully meeting all expectations, as well as people who contribute above and beyond the expectations for the role … If the organization is transparent about pay ranges, I would share the range and where their pay rate falls within it. If not, I would let them know directionally where they are.”
But if the issue is that the employee’s performance does not justify a higher pay rate, O’Connell said he would be candid with them about that, “letting them know that there is a lot of room to grow if warranted by their capability and performance, and [I] would encourage them to realize that by developing themselves and exceeding expectations.”
On the other hand, if the employee makes a good point and there is a good reason to give them a bigger increase, then, O’Connell would make an additional adjustment in the current cycle, if possible.
“If it’s not possible, I would let the employee know that their concerns have been noted and commit to an off-cycle review in six months, with no guarantee of an increase at that time, but with the possibility of an increase if the employee continues to sustain high levels of performance,” he explained.
“In that case, if an increase at that time is warranted, I would do everything I could to find a way to deliver an increase, even if it can only be a modest one. … In any case, I would thank the employee for speaking up and encourage them to keep an open dialogue about any concerns they have.”
For employers who don’t prioritize pay increases, “retention will be a critical concern because employees will leave for more money,” Leo said. “Dissatisfaction and reduced productivity by employees who feel disengaged is another ramification.”
O’Connell sees other ramifications. If they didn’t stretch on offers to potential employees in this extremely tight labor market, it can impact talent acquisition, he said.
“We may lose good talent if we don’t have the right tools and compensation levels in place,” O’Connell said, adding that it also “risks demotivating existing employees” and “employee engagement can suffer amongst people who see others getting ahead by getting offers elsewhere and either leaving the organization or getting retention packages.”
Relevant WorldatWork Resources
- Certification: Certified Compensation Professional
- Course: Compensation Immersion Program
- Course: Geographic Pay Strategies