Forecasting 2022 Pay Raises

Employers are responding to inflation and competition for talent with higher employee salaries. In 2022, forecasters project pay raises to be one percent higher than last year, averaging around 4%, the highest growth rate since 2008. More than half of human resources specialists surveyed said that companies were planning pay raises of 5% or more.

The labor market continues to be tight. Entry-level and low-income workers are in demand, and while every sector is impacted, retail, finance, insurance, and manufacturing saw the greatest wage increases. The pay increases have been significant for low-income workers, whose wages have lagged for decades.

The great resignation is not over. According to a survey by Credit Karma, 45% of employees were exploring new job opportunities. Employers increased starting salaries for new hires to stay competitive in the labor market. The first wave of wage growth began in 2021, with employees who switched jobs in the past year seeing more significant salary gains. Payroll compression became an issue as these new hires often came in at higher rates than their more experienced peers. Retention of existing talent has become a priority, and employers are responding by ensuring their 2022 pay raises are attractive to employees.

Inflation and Pay Expectations Rising

By the last quarter of 2021, we began seeing rising inflation’s impact on wage growth. Current 2022 inflation rates are at 8%. Analysts and consumers alike expect this period of inflation to be short-lived as pandemic disruptions are being resolved and actions at the federal level such as interest rate increases are being implemented. Consumers have made adjustments to their spending patterns to stretch the dollar.

Typically, there is a relationship between inflation and pay expectation. Pay raises have outpaced inflation by a percentage or two for many years. When inflation rates rise, employees expect higher compensation, which starts as a gnawing dissatisfaction that they are working harder for less purchasing power. For the time being, employees still feel that this high inflation is temporary and are waiting it out, but this confidence could wane. If inflation rates remain high and the labor market remains tight, 2022 pay raises may top projections.

While employers need to respond to higher inflation and a tight labor market, across-the-board increases have drawbacks. They reduce the reward differential for your highest performing employees and can make these employees feel undervalued. Across-the-board wage and salary increases also cut into budgets for future years.

Four Steps To Navigate Pay Raises

Employers can take a few steps to stretch their budget for 2022 pay raises and be in a competitive position to recruit new employees while retaining existing ones.

  • Employers should review market surveys for positions to tie their salary ranges to the labor market.
  • Compensation increases should include a healthy mix of across-the-board increases, one-time bonuses, and promotion and merit increases. One-time bonuses do not increase the base salary as part of the total compensation strategy. This approach helps employees when needed the most and gives time for the labor market and inflation to stabilize without the long-term impact of across-the-board raises.
  • Management should assess employees to identify high performers who may be ready to add more value to your organization and determine if there is the potential to promote the employee, increase their salary and allow them to increase their impact.
  • Businesses should keep abreast of trends in the labor market and inflation. They should develop a contingency plan in case additional increases are required in 2022 to stay competitive.

Implementing higher pay raises during this high inflation period will signal employees that we are all in this together. Still, retention has always been about more than money, and businesses that continue to focus on employee engagement will fare better during tight labor markets. This period is an opportune time to look at ways to engage employees and attractive low-cost benefits that are proven to have a big impact on employee satisfaction.

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TANDIUM Corporation has several years of experience meeting the human resources needs of businesses and nonprofits. TANDIUM’s knowledgeable staff can partner with you to develop services tailored to the unique needs of your business. Contact us today.