During the past two years the business operating environment has changed dramatically, impacted by a wide-ranging pandemic. After a steep global economic downturn, government stimulus supported a robust recovery. However, a tightening labor market and escalating inflation are putting pay and performance programs under increased scrutiny. Among the issues making compensation increasingly complex are employee turnover, hiring challenges, and intensified worker recruiting.

As the debate rages over whether inflation is temporary or long-term, economists are projecting growth of 3.7% in 2022 after a 5.6% gain in 2021. A Federal Reserve Bank of Chicago survey of economists has unemployment dropping below 4.0% by the end of 2022 and inflation dropping to 2.5%.

So, what should senior executives, compensation and human resource professionals be thinking about to address these complexities? Lappley & Associates client research and consulting experience points to four themes that will impact compensation in 2022 and beyond.

Compensation Competitiveness During Challenging Times

Compensation is often cited, along with benefits, flexibility, company culture and development opportunities, as reasons by workers who quit a current employer or join a new organization. Not only is a competitive compensation strategy a key factor to attract and retain talent, but it is also the cost of entry to employment. If compensation is not right, employees will look elsewhere. In other words, in a job market this hot, paying employees less than what they can make on the market is a recipe for losing employees. Of course, employers must strike a balance between affordable pay and level of market competitiveness.

Planned salary increase budgets reported by WorldatWork last summer were 3.3% average and 3.0% median for 2022. According to results of a recent pulse survey by WorldatWork, salary increase budgets now are expected to be 4.0% average and 5.0% median. Still, that’s about one percentage point shy of increases – 5.0% average and 6.0% median – which compensation professionals say is necessary to attract and retain needed talent, particularly in light of higher inflation, the highest seen increase since the 1980s. Further, the Conference Board reported salary increases will average 3.9% in 2022 and Pearl Meyer, in a recent quick poll, forecasts 2022 salary increases will surpass 4.0% (and increases greater than 5.0% reported by 40% of those surveyed).

These surveys bear out a growing trend to meet inflation with higher wages and salaries, but is that the best compensation solution? If you believe inflation will return to its recent rate of under 2.0%, let us offer an alternative: Keep a merit budget around 3.0% and pay a one-time COLA increase in the range of 1.5% to 3.0%. Reserve this option for long-term employees. You will be seen as keeping employees whole while not having to explain a decrease in future merit spending.

In addition to pay increases, organizations are also relying on sign-on (79%), referral (75%), and retention (57%) bonuses to attract and keep key talent, according to another WorldatWork survey. Although many employers feel a need to follow suit, the question remains: Will short-term bonus practices lead to long-term employment?

With these adjustments, newly hired employees are sometimes making the same or more than established, more experienced workers, creating pay compression issues. For people in similar roles, employers will likely need to look beyond standard merit increases to adjust tendered workers’ pay with special funding, if available. In addition, compression may also exist with first and second level supervisors.

Finally, annual and long-term incentive compensation has been on the rise for the past several years, both with number of plans and number of participants. This trend will continue as companies focus on linking compensation more closely to organization performance and lower employee fixed costs.

Pay Equity Issues Continue

Taking a strong position on pay equity can improve an organization’s public perception of its brand and becomes positive reinforcement to employees. Organizations with a formal pay equity program are more likely to have positive Glassdoor ratings, for instance. Further, when organizations make pay equity a priority it has been shown that they enjoy higher employee engagement and are more likely to exceed industry levels of productivity.

Preparing for 2020, many companies had put a plan in place to address pay inequities. With the advent of the pandemic, some of those plans were put on hold as funding of salary adjustments dried up and millions of women left the workforce to care for children and aging parents. Looking to 2022, employers need to reexamine their equity analysis and plans, and to communicate commitments to their employees. In addition, businesses should reexamine hiring, salary increase, promotion, and employee development practices to uncover reasons that inequities creep into their compensation programs.

Organizations with accurate market information and equitable pay practices should be proactive in communicating with employees as being transparent with their workers garners a perception of fair pay. With record high turnover, the mere perception of unfair pay can be harmful to a company.

Environmental, Social and Governance (ESG) Metrics Rising

For over a century, company performance was evaluated by financial measures: usually in the form of profitability and revenue growth. In the past decade, however, environmental, social and governance (ESG) measures have begun to appear. The trend has been influenced mutually by stockholders desiring to invest in socially responsible companies and employees interested in joining organizations where their purpose aligns with corporate purpose.

According to consulting firm Willis Towers Watson, the majority of companies they surveyed assess executive performance with ESG metrics, making up 15% to 20% of annual incentive program evaluation. Priority measures include sustainability, people and human resources, and inclusion and diversity. We expect more ESG metrics to support executive pay in the year ahead.

Flexibility and Remote Working Here to Stay

Pre-pandemic, flexible rewards and work options were on the rise, but the trend was accelerated in 2020 and 2021 out of necessity. As workers discovered the benefits these arrangements provided, including improved productivity and work-life balance, these practices have become essential tools for attracting and retaining talent. For moms schooling kids at home, more employers are considering parental leave and childcare benefits.

A result of added work flexibility is remote work; compensation for remote workers has not settled on a particular approach, although most organizations have decided to use a cost of labor approach rather than cost of living. The most open question seems to focus on how large a region to consider in determining competitiveness. Whether to base this analysis on a city, state, or regional scenario varies by industry and other workforce dynamics. Further considerations may arise when survey providers categorize positions as onsite, hybrid or remote.

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.