As prices continue to rise, employers are wrestling with questions and concerns about what inflation means for compensation strategy. In this episode of All Things Work, host Tony Lee speaks with Tom McMullen, senior client partner at global organizational consulting firm Korn Ferry, on navigating inflation’s impact on the compensation of both current and future employees.
As prices continue to rise, employers are wrestling with questions and concerns about what inflation means for compensation strategy. In this episode of All Things Work, host Tony Lee speaks with Tom McMullen, senior client partner at global organizational consulting firm Korn Ferry, on navigating inflation’s impact on the pay of both current and future employees.
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This episode of All Things Work is sponsored by ADP.
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Speaker 1:
Business success requires thinking beyond today. That's why ADP uses data driven insights to design HR solutions to help your business have more success tomorrow. ADP always designing for HR talent, time, benefits, payroll and people.
Tony Lee:
Welcome to All Things Work, a podcast from the Society for Human Resource Management. I'm your host, Tony Lee head of content here at SHRM. Thank you so much for joining us. All Things Work is an audio adventure, where we talk with thought leaders and taste makers to bring you an insider's perspective on all things work today, we're discussing what high inflation means for compensation strategies. The current inflation rate is running four times higher than it's been over the past decade, which is raising real concern as pay increases are failing to keep pace with rising prices, during the first quarter of the year, for example, real inflation adjusted average hourly earnings fell 2.7% seasonally adjusted, according to the BLS, the result, one of the most turbulent compensation environments, many of us have ever seen. Joining us today to discuss how inflation is impacting, how employers are reacting to this financial uncertainty is Tom McMullin. Tom is a senior client partner in Chicago with Korn Ferry, a management consulting and executive search firm with more than 8,000 employees around the globe. Tom, welcome to All Things Work.
Tom McMullin:
Yeah. Hi Tony. Good to be with you.
Tony Lee:
Well, thank you. So can you remember seeing an economy like the one we're experiencing today in which wages and salaries are up, but not keeping pace with inflation?
Tom McMullin:
Well, what's the Chinese proverb? May you live an interesting time? Well, that's what we have, you're right, I mean, wages are up, we've seen the highest rate of change in wages in the past decade, but inflation is also up and it's the highest that we've seen in about four decades. This is the most interesting time of my career. I've been in the compensation arena for about three decades. These are unprecedented times. And I think from looking at wage growth versus inflation, we've generally seen them track together. Over the past six to eight years, we've enjoyed periods of pretty low inflation and this has provided real wage growth, particularly for the highest paids in the lowest paids.
The folks in the middle have been a bit stagnant or flat in terms of real wage growth and I think that the reality is that while inflation and wage growth generally correlate with each other, they don't always move in lockstep. You don't hear much angst when wage growth exceeds inflation like in the past several years, but we're hearing it now, especially given the large gap in the fact that inflation is much higher relative to wage growth. I think the economists are predicting that some of the supply chain issues will resolve themselves as inputs align with demand. And this will hopefully lessen some of the pressure on inflation and much of the recent inflation has been a function of the price of durable and non durable goods.
Tony Lee:
And then not to mention gasoline.
Tom McMullin:
Yeah, absolutely. And with world events, like what's happening in Ukraine, this is constraining, not just the price of oil, but food commodities as well. So these are pretty volatile times hitting different parts of the supply chain.
Tony Lee:
Definitely. And it's funny if you think back the last few years, a companywide salary increase of two and a half percent was thought of as, "Hey, that's not bad given an inflation rate of zero basically." But research from salary.com shows that about three out of four, US employers are targeting a payroll budget increase this year of a 4% or more, and about half are expecting salary meriting increase hikes of about 5% or more, but that's not going to keep people whole, is it?
Tom McMullin:
Well not relative to current inflation, right? But if inflation is tempered, we may get into a better position. I think the salary.com data is generally consistent, maybe a shade higher than other data sources I've seen, including Korn Fairy's. We did a study of a couple of months ago in terms of what organizations were planning for '22. And we were seeing an average increased budget of about 4% in the US across most industry sectors. And that's also pretty consistent between executives management professionals down in to support roles as well. Now, those budgets don't impact everybody at the same level. I'd say there's more upward pressure on hourly jobs. And in some subset roles, stem fields, technical skills that are in short supply and high demand. So you're going to see some of these treatments spiking a bit, especially when people move from one company to another.
The other thing organizations need to be careful with these salary increased forecasts. There's a number of organizations out there. I'd say about half of them that don't budget for what we call Off-Cycle increases. So an On-Cycle increase is the typical salary increase budget, merit budget, an Off-Cycle increase would include things like promotions, often pay equity adjustments, things like counter offers, and that could account for upwards of another full percentage point. So I think in a lot of these forecasts, those reported numbers could actually be a shade low, somewhere between half a percent to a full percent. So my advice to companies, HR leaders is really think about what you need to spend, not just your On-Cycle, your merit increase budgets, but also these Off-Cycle adjustments as well, and make sure that you've got the right magnitude of increases depending on what your objective are.
Relative to inflation, even these numbers, the 4%, even the 5%, it's still not going to close that gap on inflation, but most companies do benchmark their pay increases with pay increases of other companies, not the inflation number. Again, they don't always... They correlate, but they don't always move in lockstep.
Tony Lee:
Yeah. A perfect example of that at the lower end are hourly employees who are going from $14 an hour to 16, 18, $20 an hour, significantly higher than the average pay hike. But again, you're right, it's pegged to other companies and what they're doing to attract and keep these people, right?
Tom McMullin:
Absolutely. And if a big... If an Amazon or a Walmart moves in across the street and their rates are a lot different than yours, I mean, that's your immediate competition. So you need to be pretty responsive and pretty flexible, in terms of your whole ability to get talent in the door and to keep talent.
Tony Lee:
Yeah. Now, along that line, let's flip the equation here, interesting survey by Grant Thornton of workers, not employers and of the workers, 31% are expecting pay increases of at least 8% this year, 21%, at least 10% this year. You think that's likely?
Tom McMullin:
No. In short, no. It's not likely for the typical employee, those could be likely numbers for top performers and folks in high demand, limited supply roles, but I'm also not surprised to see that many employees have these types of expectations regarding pay increases, I think there can be a natural tendency for an employee to think that they're worth more than what they're paid. I'm also sad to say that many companies don't do a great job at communicating pay related information to employees about the what, why and how they're paid.
About half of companies acknowledge reporting minimal information about their pay program. Less than half of the companies actually provide market ranges, their base salary ranges to employees, or even provide total reward statements. So there are a number of employees in the dark. And when you're seeing some of these accounts on the news, it's pretty easy to say, "Oh, well, I might be getting these whopping numbers." But again, most employers base their pay increase budgets based on the compensation forecast, not these cost of living inflation based surveys.
Tony Lee:
Yeah. Well, and it's becomes a self-fulfilling prophecy, right? I mean, if employees did get eight, 10 and higher percent increases, that's just going to cause more inflation, right?
Tom McMullin:
Yeah. I mean, it's this kind of endless spiral. So the last thing companies want to do is, you don't want to take maybe a short term temporary inflation issue that may be caused by a constrained supply chain or world events and bake all of that into a base salary number, which you're going to be paying for as long as that employee is with your organization, right? So there may be some other vehicles, other tools that companies can use like variable pay or supplemental checks, but baking that into base pay is something most companies don't want to do.
Tony Lee:
So to follow up on that, are you seeing more of that? Are you seeing companies saying, "Okay, everybody gets $500." Instead of committing to a pay hike, which of course then lives on forever, they're doing spot bonuses or reward bonuses or something like that to compensate?
Tom McMullin:
Some. I mean, these are unprecedented times. We're seeing companies make more creative use of tools in the toolkit than we have before. So, all of these retention and attraction issues, aren't just about pay, but within the compensation toolkit, we're seeing tools like sign-on bonuses, referral bonuses, "Hey, we'll give you a hit if you can refer some good employees that you think would work out well for us." Retention bonuses, counter offers, some of these variable pay treatments to help offset the cost of commuting. I would say some companies are considering those. I wouldn't say it's a majority, but I would say it's fair to say over the last two years, that there has been more increased adoption usage prevalence of these various tools, again, sign-on bonuses, referral, retention, counter offers, hero pay, with some of these frontline workers during the toughest parts of the pandemic, there were a dollar, $2 an hour increases going to nurses, distribution employees, essential workers.
Tony Lee:
Right. All right. So let's dive into this a little bit more. So, you kind of alluded to the great resignation, everybody's testing the water or, is the grass greener on the other side. And all the research, including research from SHRM has showed that the number one reason employees are changing jobs is money. It's the old adage, if you stay put, you get the 2.5%, if you jump ship, you get significantly more. So given the talent shortages, you mentioned all the different things companies are doing, is it widespread? I mean, you see the first movers who are out there doing the big sign-on bonuses and things like that, but are you starting to see the mom-and-pop companies getting in line as well?
Tom McMullin:
If they're being impacted... Again, we're seeing companies do things that they would in normal times, not necessarily do, leveraging some of those tools that we just talked about. I think that pay, being the number one reason employees are changing jobs, I think it's one of them, but the number one reason, I think it varies. I think it varies in large part based on where you are in your career life cycle. I think competitive pay is absolutely critical for getting talent in the door. And I think competitive pay is more of a differentiator for retention, for hourly in support roles and less for management and professional roles.
I like to use the notion of there's kind of two moments of truth for companies in winning the war for talent, the first moment of truth is getting that talent in the door, to make that candidate pick your organization versus another one and the reason why pay is so important in that first moment of truth in getting that candidate in, is because there's limited reference posts that those prospective employees can use to compare and make a choice, pay is a big one. So your comp and benefits offer, the organization's reputation, how the employee feels about the people that they interviewed with. I think once we get to the second moment of truth in the employment contract with folks, that's, "Why should I, as an employee wake up and want to go back to work for your company versus someone else?" Our research suggests, especially for management professional jobs, that the financial rewards like comp and benefits are of secondary importance compared to non-financial rewards.
Number one on our list year after year is career and development opportunities. If I'm not being developed in my career in my organization, I start getting nervous and if I'm not going to get my promotion here, with my company today, I'm going to look to get it somewhere else. I think in addition to career, it's about wanting to work for a winner and the mission and the purpose of the organization. It's about, "Does this company that I work for, provide me with an energizing work climate? Do I like my boss and my coworkers? Do I have trust and credibility in leadership?"
And I think a lot of times in surveys and in exit interviews, employees will say that the reason I took this job is because the pay was better and I got an offer I couldn't refuse. And that's honestly a convenient answer. It doesn't burn bridges with the organization you're leaving the real question to ask in the exit interview to the employee is "Why did you pick up the phone and listen to the offer in the first place?" And quite often it's around those non-financial rewards or lack thereof that I just mentioned. Now, having said that I think hourly's support roles are more susceptible. There's more of a... In the hierarchy of needs, wanting to have kind of a base level security with a living wage and with a benefits package. So I do think that in our data suggests that competitive pay and benefits do rise, rise up the line there.
Tony Lee:
Well, and bad boss often shows up at the top of that list too. So-
Tom McMullin:
Yep, absolutely.
Tony Lee:
Any excuse to look around. And it's funny because we've written a lot about how HR is getting into training of frontline managers as to what to say when the employee comes and says, "I'm leaving, I've got bad news." The strategy seems to really be shifting. I'm curious if you're seeing this from, "Oh my God, you can't do that to me." To, "Well, congratulations, that's great and we value you and if things don't work out the way you hope there's always an opportunity for you to come back." Are you seeing that too?
Tom McMullin:
I see a lot of companies that don't do an adequate job in equipping those people managers with any kind of guidance on how to think and how to talk to their employees about that. A lot of managers are kind of on their own. And in fact, we find out that over 90% of companies don't even have a policy or a strategy around counter offers. So, when that employee comes in and says, "Hey boss, I just got a very attractive offer, I really think I need to take it, I'm going to be leaving." So then what does the boss do? The boss calls HR or their second level manager and says, "We can't afford to lose Stan or Sue, what do we do?"
Wouldn't it make sense for organizations to have a playbook and maybe ask a couple of key questions? Do we want to make an offer, a counter offer for this employee? Are there certain roles in our organization where we don't have bench strength, where if this person walks, we are in deep trouble, there are other jobs where we've got plenty of folks doing the same role. And if they're an average performer, why would we be in the business of providing a counter offer? This could be a great opportunity to have someone step up and take a bigger role.
So I think thinking about the types of jobs and the types of people that we want to consider for counter offers, would be a big step forward for a lot of organizations. And then, what goes into a counteroffer? A lot of times, it's about showing the love via money, compensation, increased cash, maybe a job title, or it's forcing the decision on the promotion that maybe should have happened before, but thinking also about what goes into that counter. A lot of times, these employees are attempting to leave the organization, not because of pay, but because there's climate, culture, relationships with the boss and I'm not going to burn my bridges, so I may not tell you that when I'm tendering my resignation.
So you need to be careful and thoughtful in the process that you use too. Maybe it's not the boss that has the discussion with the employee. Maybe it's the second level boss that has that discussion in terms of, "Hey, what, why are you considering leaving us?" To really get at the root cause issues and then make that as a part of the counter offer, not just about pay and title, but what is it, if anything that we need to change around your employment experience to make you feel better about staying here?
Tony Lee:
Yeah, no, that's great advice. And that leads to such a problem at a lot of companies. We don't have a lot of time left, but can you speak to the idea of, let's say you have a team of five, six people who are all making the same relative salary, and someone says "I'm leaving." And you don't want them to leave and they get the big pay hike, well then what do you do for everybody else who's remaining. I mean, the lesson for them is "Threaten to quit and that's how I'm going to get my next raise." I mean, how do you handle that?
Tom McMullin:
You've got to be prepared, whatever decision that you make for that employee. You've got to be able to live with that decision, right? I always advise clients that if this counter offer that you make, hits the front pages of the company newspaper, how are you going to defend it? Can you defend it? What is the rationale for making an exception to this individual? Is it same job, different job? The easiest scenario would be to recognize a different role with different title, different pay, if you can go there, but if you can't go there, make sure that you do some type of internal assessment on how you can rationalize any different treatment for this person who may not be the best performer or have the highest potential, but they did get an offer in hand they're about to leave.
In some cases, you might need to treat some other folks in the group. In other cases, if people start squaking, it may be an opportunity to make some folks available to your competitor. You've got to walk the fine line between doing what's right for the employee, the organization, and the peers to that employee. And tough choices need to be made. If you don't take into account, the perceptions of other, you just may be paying the price down the road.
Tony Lee:
Yeah. Well, Tom, this has been great. That's going to have to do it for today's episode of All Things Work. A big thank you to Tom McMullen of Korn Ferry for joining me to discuss how inflation is impacting pay structures and what we can expect to see moving forward. Before we get out of here, I want to encourage everyone to follow All Things Work wherever you listen to your podcasts. And remember listener reviews have a real impact on a podcast visibility. So if you enjoyed today's episode, please take a moment to leave a review and hope others find the show. Finally, you can find all of our episodes on our website at shrm.org/podcast. Thank you for listening and we'll catch you next time on All Things Work
Speaker 1:
Business success requires thinking beyond today. That's why ADP uses data driven insights to design HR solutions to help your business have more success tomorrow. ADP always designing for HR talent, time, benefits, payroll and people.