Inflation and Pay Raises: State of the Union

It’s a “summer of pay increases,” according to a Wall Street Journal article this week reporting on how large companies are reacting to continuing inflation and labor shortages. Examples in the article include ExxonMobil’s announcement that it raised wages 3% in the U.S. in June “to maintain competitiveness” while also tripling the number of equity-eligible employees. Similarly, T. Rowe Price announced a 4% off-cycle raise for about 85% of its workforce to account for inflation and respond to an uptick in attrition among technology and entry-level workers. 

The article cites a May Pearl Meyer study which found that 2022 increases are now up to 4.8%, with about two-thirds of companies reporting increases in excess of 4%, and a quarter reporting increases over 6%. Additionally, about a third of companies reported considering or planning mid-cycle increases similar to ExxonMobil. 

With pressure from employees building amid very uncertain times, a new series by Willis Towers Watson may be helpful. The first installment focuses on inflation and talent and provides several useful insights: 

Base salaries and inflation: Many employers are hearing from employees that increases should keep pace with inflation, but traditionally, this is not the case. Typically, base increases reflect market conditions rather than the overall cost of living – for example, salaries don’t go down in times of low inflation, even though the cost of living for employees is lower. 

Inflation and labor shortage: However, as the article points out, the last time the United States experienced high inflation and low unemployment at the same time was in 1969. The “double whammy” means that employee concerns about inflation vis-à-vis their base pay can’t go unaddressed, as many companies are now experiencing. A return to the basic principle that compensation must successfully “attract and retain” talent is helpful here; if the company is experiencing attrition or difficulty in attracting talent, adjustments must be made.

Salary vs. incentives: The article also points out that, as many have stated, salary budgets in 1981 (the last time we experienced high inflation) were 10.5%. However, that does not take into account the shift toward providing more of an employee’s annual pay in variable incentive form. This is also a critical tool in an employer’s arsenal to avoid irrevocably increasing salary budgets, since another maxim of pay warns us that “pay never goes down.”