How High Inflation and The Great Resignation Has Impacted the Annual Employee Pay Raise Calculation?

By Jessa Martin On Dec 14, 2021

The Great Resignation occurs as inflation rises, and companies face the tightest labor market in recent memory. Corporations are making record profits, while people are struggling to keep up with soaring prices for food, petrol, automobiles, and housing. But that doesn’t guarantee wages will rise at the same rate as inflation next year.

The latest Consumer Price Index reading was 6.8%, the largest year-over-year increase since 1982. While the fourth quarter CPI data may be at an inflation peak, employers’ predicted wage increases for next year are barely half the current level.

They had it easy for a decade. Inflation has been between 1% and 2%, while pay hikes have been between 2% and 3%. For the first time in decades, inflation is a consideration in determining annual raises, according to Gad Levanon, Conference Board chief economist.

This conflict between employers and employees was clear at a Google employee meeting this week, where staff was advised that raises won’t always be linked to inflation.

In the current CNBC All America Economic Survey, inflation has surpassed Covid as the public’s #1 economic concern.

Despite these concerns, the Mercer Compensation Planning Survey predicts a 3.2% rise in pay budgets in 2022. Adding merit and other base pay increases, such as promotion pay increases, brings the projection to 3.5 percent. Mercer’s outlook is somewhat higher than the 3% and 3.3% pay raise projections it made in August, despite rising inflation. This year’s merit raises were 2.8 percent, with a 3% overall pay budget rise.

Employees are unionizing at a rate not seen in decades, and millions are quitting their positions – 4.2 million workers departed their jobs in October, a little decrease from September, but leaving 11 million job opportunities. It’s no surprise that employee expectations have risen to an all-time high.

Pay increases have space to grow in 2022.

As a result, employers have had to raise incentives, salary and chances to attract and retain workers.

“Most company rises in 2021 were far lower than the cost of living,” Levanon said. “Maybe in 2022.”

Many employers are watching inflation closely and increasing salaries more than expected. Pearl Meyer conducts an annual poll on salary budget assumptions. After hearing anecdotal reports of significantly greater increases and more anxiety about maintaining and attracting new personnel, the firm decided to re-survey employers at the end of November. Half of the employers are revising their pay budgets for 2022 and anticipate granting greater raises than expected.

Overall, the pay budget projection rose to 4.2 percent, “which is greater than the low 3 percent we’ve seen in 20 years,” said Rebecca Toman, vice president of Pearl Meyer’s survey business unit. The average rise in pay budgets for half of the companies is now 5.2 percent, and 25% aim to increase pay by over 6%. “Firms are looking again, which is significant,” Toman said.

Compensation budgets are the highest they’ve been since the 2008 financial crisis, according to Lauren Mason, senior principal in Mercer’s career division. They also don’t include “off-cycle” pay increases that firms have made during the year, she says, with 37% of employers raising minimum wages in 2021. “These minimum wage hikes are being driven by large employers,” she noted.

Wanting a better job

With the tight labor market pushing pay rises and the economic and health uncertainties caused by recurrent Covid viral waves, most companies are still battling to attract and retain workers.

Departing may be the quickest way to get a bigger pay deal.

“The fact is that most employees would have little issue finding a new role,” the Mercer survey’s authors said.

“The best way to accomplish it as a worker is to quit,” says Andrew Challenger, senior vice president of outplacement and career transitions firm Challenger, Gray, & Christmas. “Or negotiate with your company to equal competitive wages,” Challenger added.

“Many workers move jobs and earn a substantial pay raise, often more than the cost of living,” Levanon added.

Most economists expect inflation, particularly wage inflation, to continue in 2022, Challenger said. Even if inflation remains high, it is projected to moderate. “It may be two months or a year. But it won’t be 4 or 5% a year for the next five years,” said Lawrence Mishel, a distinguished fellow at the Economic Policy Institute.

A worker’s pay is tougher to adjust down in future years as inflation falls, therefore firms take it into account when establishing pay rises. Annually, the rate of rising compounds.

The C-perception suite’s of wages

Even with record profits, CEOs are anxious about the wage-price spiral, where increasing labor expenses fuel higher inflation. The Fed says it hasn’t seen any indicators yet, but the labor market and economy are real.

On Friday, former Fed vice chair and Council on Foreign Relations senior fellow Roger Ferguson told CNBC’s “Squawk Box” that finding staff is still challenging. “We’re starting to witness just the beginning of what we term the wage-price spiral.”

The more corporations pay, the more margin they may have to give up, which will not please shareholders.

David Kostin, Goldman Sachs’ senior US stock strategist, told CNBC on Friday that wage inflation is a key concern. Because of this, he is wary of companies that spend a large number of their operating costs on labor. “That’s a headwind,” he remarked.

The Pearl Meyer data shows that privately owned corporations are more likely to raise pay than public companies and non-profits, which have lower sales and less flexibility in annual spending budgets. Private corporations are proposing the biggest raises, and they aren’t subject to the same shareholder scrutiny as public companies. Public corporations may also address pay through long-term equity and other incentives.

“It’s crucial for employees to remember that employers are investing in their staff beyond pay,” Mason added. “Employers have invested heavily in expanding health and wellness programs throughout the pandemic.”

According to Mercer, 1 in 4 firms will increase their bonus pools by 10% or more.

Employers are turning to variable compensation as a way to increase employee pay without permanently altering the cost structure, Mercer said.

Many corporations, especially those with significant lower-wage workforces, have added advantages like free college tuition to attract and retain employees.

Companies also award “extraordinary” conditions special bonuses, Toman noted.

Google recently decided to award staff a lump sum cash bonus. For example, unlike a change in base compensation, bonuses, and long-term incentives allow employers to keep basic salaries stable while giving employees more upside. Workers should analyze the total compensation package before making a decision based solely on pay.

Many reasons should lead inflation to decline over time, even if it remains higher than in the preceding decade, including supply chain hitches being ironed out and more people returning to work. Challenger believes that filling the 11 million unfilled jobs will help reduce wage inflation. More people return to work. Still, jobless claims fell to their lowest level in five decades.

Despite the fact that inflation is expected to remain high in early 2022, companies may still modify pay to reflect local economic realities. Companies responding to the Pearl Meyer poll said they will constantly monitor inflation. “We know it’s a key driver,” Toman said. “Some employers may even add mid-year hikes in 2022 if they cannot keep up,” she warned.

Even if the data shows salary increases won’t keep pace with inflation, Toman says one compensation result should cheer workers. Almost all (99%) of those polled expect raises in 2022. “That’s unusual,” Toman replied. “That says a lot. Without a pay rise program this year, you’ll be very behind in 2022.”