Why High Inflation Doesn’t Always Mean Higher Wages

Hovering around the 8% mark in the US, inflation is a huge headache for HR leaders. Not just in the US, but all across the globe, people want to know how their salaries will keep pace with a higher cost of living.

In preparation for 2023, responding to questions about inflation adjustments to pay will be the foremost thought in many employees’ minds. Despite the economic slowdown and mass layoffs in some industries, talent shortages remain.

Therefore, the key question giving HR leaders sleepless nights is, “Should high inflation result in higher pay?”

Linking pay increases with rising inflation can lead to pay disparities across regions and budgetary issues when inflation subsides as part of acyclical process

In the short-term, paying higher to new recruits to address inflation also creates additional problems. Pay compression, the phenomenon of new hire salaries being comparable to or higher than more experienced counterparts, is becoming common.

It damages employee morale and hurts the overall workforce experience (Wx).

But, there are some ways to address inflation-related challenges without breaking the bank:

1.) Refresh your pay philosophy: Keep your pay philosophy market-aligned and revise pay ranges for tenured employees based on the market. In addition, ensure that new hire pay is reasonable and not causing pay compression.

2.) Consider paying above the living wage: Lower-rung employees are often worst hit by inflation. While CEO pay returns to pre-pandemic levels, inflation hurts the most vulnerable employees. Paying them above the living wage will ensure financial well-being without it being prohibitively expensive

3.) Look at one-time bonuses: Lumpsum payments, sign-on bonuses, or other one-time payments can be considered to ease the impact of inflation without creating a permanently higher expense category.

4.) Promote your existing benefits: Make the effort to help people understand the benefits provided, including career and growth opportunities. Providing assistance for travel or remote work setup can also be considered in the short term.

5.) Embrace pay transparency: Train managers to talk about pay with their people and help people understand the rationale behind pay decisions. Be proactive in dispelling any doubts about market comparisons or pay fairness. Help managers with messaging to explain to people that they are being paid for the cost of the job and not for inflation in the economy.

Higher wages are no longer a retention tool, and the only way to motivate, engage, and elevate employees is through a stronger Wx. Create opportunities for two-way dialog between managers and employees to discuss and resolve pay concerns.

Articulating the Wx to people and helping them understand total rewards also saves money for companies in the long-term, in addition to bringing stability in pay programs.

To discuss more about effective pay programs in 2023, reach out to us at [email protected].

About the Author

Sumit Single
Sumit has been working in HR & HR consulting roles for 16+ years across sectors and verticals and specializes in
organizational design, well-being, storytelling & design thinking, and performance management. In his career with consulting firms such as Aon, Deloitte, and Accenture, he has successfully led programs aimed at total HR transformation for clients.
As Associate Director for India Consulting at Deloitte, he recently worked with clients on cultural transformation, HR processes, and policy design. He also organized and spoke at conferences and events about various topics relevant to HR today.
Now self-employed, he works with clients across the globe on various HR solution areas.
Sam Reeve
Sam Reeve, CompTeam founder and managing consultant, is a pay and talent performance expert and a certified global compensation professional. His extensive experience with pay programs and competitive compensation analysis, career architecture, and talent management allows him to help clients of rapidly growing firms see accurate, measurable results, including increased productivity and significant pay savings, year-over-year.
As an innovative thinker with practical application, Sam strongly believes that everyone needs to be healthy and happy in their own lives to strive as a high-performing contributor. He is driven to help organizations match their employees with the work they are passionate about and reward their people for outstanding work.
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