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Keeping up with the Joneses

Just last week, Microsoft announced that it would be doubling its “global merit budget”. The tech giant is not the only multinational planning to pay employees even more. The fact that inflation is at its highest level since the 1980s, coupled with the intensely employee-friendly market, the world’s largest companies are being forced to pay more to retain their workforce. This is doubly true in key areas, according to Pearl Meyer’s, a compensation consulting firm that runs surveys. Their most recent survey shows that despite last year’s largest-ever annual increase in salaries in decades (4.8%), one-third of decision-makers at top companies are feeling intense pressure to up their salaries again by the end of the summer.

In a typical year, companies offer standard cost of living increases of 3 to 3.5%. So, when Pearl Meyer polled companies at the end of 2021, and they responded with a plan to increase salaries by 4.2%, it was not a huge shock. While 4.2% is certainly higher than normal, it is by no means record-setting like 4.8%. For a quarter of organisations, salaries have actually increased by 6%. Generally, workers have been happy with these pay increases. A recent CNBC survey showed that 69% of workers were satisfied with current wages. 80% were happy with recent raises. But despite these positive sentiments, the burden of never-ending inflation is casting a long shadow. Some 74% of workers believe that their current wages will not be enough to keep up with ever-increasing costs. Interestingly, the workers that are most feeling the inflation crunch are those who are in the middle of their careers. Executives and managers are usually taken care of, meaning their compensation packages have grown enough to account for inflation. Workers at lower levels have also performed surprisingly well when it comes to recent inflation adjustments. This runs against the conventional wisdom of “first in, first out” that was so apparent following the Great Recession.

Motivated by Fear

The fact of the matter is that even companies like Microsoft will have trouble keeping up with 8% inflation (although a recent notification in my inbox indicating that my monthly Office subscription would be increasing by 20% might help). Experts do not expect inflation to maintain its current levels, but then again, the same experts did not expect inflation to climb to and stay at its current levels. From a compensation standpoint, these raises are difficult for one main reason: once raises are implemented, they are almost impossible to reverse. When inflation does finally cool down, those salary expectations are here to stay. For that reason, consultancies are advising companies not to offer pay increases in the form of salary increases, but instead one-time merit bonuses. This both avoids the compounding raise issue while also giving employees lump sums, which appeals to many.

Despite employers trying to retain some control with one-time bonuses, it is clear that workers currently have the upper hand. Pearl Meyer’s surveys show that it is fear of losing employees that is motivating employers to give raises, not inflation. Recruiting new people, then training and developing them, is quite expensive. Given the state of the labour market and the world, pay increases alone will not be enough to retain employees. Companies must be able to offer something extra, perhaps the same things they have been claiming to provide for many years: a sense of community, opportunities for professional growth, and purpose.