It is increasingly challenging to administer compensation in an uncertain economic climate. Inflationary pressures, wage compression, competition for talent, and the prospect of a recession are a few of the challenges that make it difficult to keep up with increasing compensation demands. We believe there are five current economic influences that impact pay
decisions:

Influences that Impact Pay Decisions

First, a company’s ability to increase customer prices is waning. During the pandemic with supply disruptions and higher commodity prices, a customer conversation might be difficult to have, but price increase discussions were relatively straightforward. With inflation trending down, customers expect their prices to stabilize. This makes it harder to pass wage increases. Lower margins leave less room to raise wages.

Second, although job openings continue to decrease and quit rate it back to pre-pandemic level, competition for key talent continues to be robust as witnessed by an unemployment rate in the mid-three percent and recent monthly hiring trends. Third, inflation continues on a downward trend as the Federal Reserve has raised interest rates over several months. However, even at reduced levels, after three years of pay increases, employees have not kept up with inflation; they are looking to recover much of the gap. A fourth influence is that the cost of investments is growing as increased interest rates make it more expensive to invest in artificial intelligence and automation, potentially replacing the need for people.

Finally, the fear of a recession is significant, although CEOs, according to a recent Conference Board survey, are expecting a short and mild recession. However, many organizations continue to be reluctant to invest in higher compensation costs.
Current Approaches to Compensation So far this year, companies are not using a common approach to compensation increases. We highlight below several that we have recently found:

● Companies with sufficient cash and an optimistic view of future business are providing compensation increase budgets between 3.0% and 4.0%. This is less than the projections in surveys earlier this year of between 4.0% and 4.5%.
● Many organizations are relying on bonuses rather than salary increases which are, of course, fixed costs going forward. Bonus types include sign-on, retention, referral, and performance. Salary increase budgets of these organizations are around 2.0%.
● A few companies are handing out a cost-of-living adjustment of 1.5% to 2.0%. They then are waiting for fall to give further increases when a clearer economic picture develops.
● A small number of organizations are looking to offer time-off benefits. Examples include providing half the crew with Friday afternoons off and the next week the other half leaving at noon, or closing the day before July 4 th or the Friday before Labor Day weekend, providing a four-day holiday.
● Many employers are offering or strengthening relatively low-cost, non-medical benefits such as life insurance, disability insurance, accident, legal plans, ID protection, and pet insurance. We urge organizations to poll their employees to determine the highest interest prior to adding additional benefit programs.

Interesting Times
A Chinese proverb says, “May you live in interesting times.” Well, we are. Pay trends are both disruptive and challenging, but the upside for those able to navigate the tricky terrain is substantial and impactful.

Pay Transparency
A new pay-equity focus is being reinforced by regulatory legislation. Several U.S. jurisdictions have recently passed or are about to pass laws requiring organizations to disclose salary ranges for job postings. The EU is, perhaps, even more advanced than the U.S. in disclosure requirements. WorldatWork reports that two-thirds of organizations state they are subject to regulations requiring disclosures.

The legislation mandating the disclosure of pay ranges aims primarily to create transparency and reduce pay inequities for underrepresented groups, both during recruitment and for current employees. But critics report it will only add to compensation costs. We expect to explore more fully pay transparency in our next Compensation Alert newsletter.

Contact Us
If you would like to discuss your approach to compensation increases, please contact Neil Lappley at nlappley@lappley.com or (847) 921-2812.

The past few years have certainly been eventful, from both a talent and rewards perspective. The intersection of a global pandemic, world political and supply chain disruptions, shortage of talent, and raging inflation present difficult terrain to manage for both employers and employees. 

In 2023, employers will continue to face significant pay challenges: a competitive talent landscape, an exhaustive workforce, and pressure to control costs amid a potential economic downturn. How employers respond could determine whether they are an employer of choice. 

So, what should employers be thinking about to address these complexities? Lappley & Associates research and consulting experience point to four themes that will impact compensation for 2023 and beyond.

• Determining and implementing compensation strategy short term.
• Embedding pay equity principles in rewards programs.
• Being transparent in pay management.
• Making rewards communications more effective.

These four trends are explored below in this month’s newsletter.

Update: 2023 Compensation Budgets

Faced with uncertainty over inflation and a possible recession, most companies plan to raise salaries, but not enough to keep up with the cost of living according to a recent Korn Ferry pulse survey focusing on compensation and rewards strategy. Survey participants reported that companies are planning 2023 wage increases of between 4% and 4.5%. This is consistent with our November newsletter that summarized several surveys reporting on 2023 anticipated compensation increases.  

And while wage increases are going up, they still trail the inflation rate. It seems that a number of companies are taking a wait-and-see approach so that they don’t lock in costs that lead to layoff recession hits. While hiring has softened a bit in the past couple of months, there are nearly two times as many jobs available as there are people to fill them. In addition, recent communications by the International Monetary Fund (IMF) suggest that, forsaking major international events, the U.S. economy will, at worst, face a mild recession. It’s still a workers’ labor market. 

While companies balance the costs and returns for increasing salaries, including differentiating increases between excellent and long-term employees, funding equity increases, and addressing competitive practice for high-demand positions and high-potential employees, they often continue to utilize hiring and retention bonuses. 

Pay Equity

While many organizations conduct pay equity audits to ensure that pay outcomes don’t appreciably vary between gender and race groups, a great deal don’t go beyond these initial efforts. Inclusive organizations are insisting that their rewards programs are inclusive, as well. This expands a narrow focus on statistical analysis to include the following.

• Inclusive contributions incorporate a belief that rewards are an investment and not simply a cost. This approach incorporates leaders including underrepresented talent, along with other stakeholders, to be part of design thinking. This fosters alignment and a feeling of ownership across the organization.  
• Expand statistical assessments to include overall pay gaps across all employee groups.
• Establish metrics and processes to measure accountability.
• Setting up rewards processes that support pay equity, including hiring, promotions, and development.
• Optimizing the balance between freedom and framework, ensuring that management discretion has appropriate guiderails to minimize pay-equity risk.
• Education for all employees including managers who are at the forefront of inclusion administration.

Pay Transparency

A new pay equity focus is being enforced by regulatory progression. Several U.S. jurisdictions (e.g., California, Colorado, Connecticut, Washington, and New York City) have recently passed laws requiring organizations to disclose salary ranges for job postings. That follows many jurisdictions that don’t allow asking recruits for their salary history. Passage of these laws will likely drive disclosing pay ranges nationally. 

Disclosure of pay ranges aims primarily to reduce pay inequalities for underrepresented groups. However, recently newly hired employees have often leapfrogged incumbent employees into higher paying jobs creating equity issues and concerns about employee engagement, loyalty, and disillusionment leading, of course, to their leaving the organization.  

Organizations facing this new legislation need to reexamine the design of their compensation programs. This process starts with a review of the purpose of the organization’s rewards strategy, followed by ensuring that logical rewards processes and structures are in place, and that the rewards programs are aligned with the business.

Following reexamination of rewards design, it must be communicated to all employees. Rewards should not be seen as a black box. Communication elements include strategy intent and alignment with organization purpose, determination of job grades and titles, competitive benchmarking, and how individual performance is rewarded.

Robust rewards program design enables companies to have a good story to tell which they need to share effectively and transparently.

Pay Communications

Rewards convey a very loud message to employees about the organization’s values, culture, and character. It may be the loudest day-to-day message an employee receives. Employees have become more discerning and demanding than ever with high expectations of their employer which have increased during the ongoing talent shortage. It has become more complex with expanded employee expectations such as linkage of employee and employer purpose, fairness, and the ESG agenda. 

Therefore, it is imperative to deliver a highly regarded reward to employees with effective communications. Marketing plays a pivotal part. To the extent possible, communications need to be personalized, or at least segmented, based on employee needs. If achieved successfully, it is a competitive advantage.  

The key to communicating compensation centers on managers. A majority of employees say their manager is their direct link to their organization. But people managers are struggling to balance their employee expectations of purpose, flexibility, and career opportunities with performance pressures from senior management. In 2023, managers need to provide support and education to bridge the widening skills gap, while clarifying the linkage between company goals and employee compensation. 

Contact Us

Contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com to discuss 2023 compensation challenges and trends.