With Inflation and Uncertainty Impacting Compensation: Employers Respond

Author: Natasha K.A. Wiebusch

November 7, 2022

Theodore Roosevelt once said that comparison is the thief of joy. Though an admirable message, avoiding comparison is not always possible, or wise, for the matter. Employees comparing their earnings last year with their earnings after skyrocketing inflation in 2022 know this well.

Fortunately for these employees, new jobs have not been hard to come by as of late. This most recent period of high inflation has been paired with a uniquely tight labor market. The result? Unprecedented quit rates, hire rates, and now, salary increases… a trifecta of trends which pundits have awarded with names like "The Great Reshuffle" and "The Great Resignation."

But now, signs of recession are bubbling up in the most unlikely places, and employers are wondering: is it really time to "batten down the hatches?"

XpertHR's recent data shows that when it comes to compensation, the answer may not be so simple.

Yes, Inflation is Reducing Real Earnings

Inflation has indeed become an increasing challenge for many employers. Data from the World Bank and the US Bureau of Labor Statistics (BLS) show that these challenges may continue to get worse.

According to the World Bank, from June 2021 to June 2022, inflation increased by 9.1%. For comparison, in the 30 years prior to the coronavirus pandemic (1990-2020), the average rate of inflation in the United States was 2.41%, with a peak inflation rate of 5.40% in 1990 and a valley of -0.36% in 2009.

On the other end, employees' real earnings haven't kept up. In fact, since the end of Q1 2021, the percent increase in inflation has continued to outpace average hourly earnings in the private sector, making it harder for employers to provide meaningful raises.

And Yet... Quit and Hire Rates Soared

In July 2022, the Pew Research Center reported that employees who stayed with their current employer were less likely to increase their earnings than employees who switched jobs. That is, salary raises were not keeping up with inflation…but competing offers were. Though competing offers have historically outperformed raises, record inflation has increased the impact of these gaps.

At the same time, employees were able to leave their jobs and move because 2021 and 2022 saw an unprecedentedly tight labor market. One that was so tight in 2022 that labor shortages became a problem for multiple industries.

Suddenly, the "Great Reshuffle" makes more sense. If employees don't see the raises they want and employers are desperate to fill positions, employees are more likely to request higher compensation. Predictably, employers are more likely to accommodate these requests.

How Employers are Preparing for 2023

After a roller coaster of a year, employers must now prepare their 2023 compensation plans. This task is quickly becoming harder to accomplish, as the possibility of recession looms larger by the day. Clearly, nobody has all the answers. Here's what we do know:

1. Competitive Employers Will Increase Compensation in 2023

This unique labor market has had a significant impact on salary increases for 2023. According to our forthcoming Salary Budget 2023: HR & Compliance Center Survey Report, the average 2023 salary increase is projected to be 4.7%. A quarter of responding employers plan to provide increases of 5% - 7%. Meanwhile, 13% of employers plan to increase salaries by more than 8%.

Among the top five pressures for salary budget increases, inflation led the pack, closely followed by salaries in the industry and recruitment and retention:

Despite inflation being the highest-ranked pressure for salary budget increases, projected increases will not catch up with inflation.

To match the purchasing power of $60,000 in July 2018, employees need:

2. Employers Should Prepare to "Recession-Proof" Compensation Packages

Market indicators show that employers may not be able to meet salary increase demands for much longer if the economy shows more signs of recession. In August 2022, PwC reported that 50% of employers already have layoffs in the works. Additionally, 46% of employers are dropping or reducing signing bonuses and 44% are rescinding offers.

Two months later, large tech companies, including Microsoft and Alphabet (Google's parent company) reported not-so-stellar revenue and profits, respectively. These and other financial indicators have 98% of US CEOs bracing for a recession.

And yet, almost simultaneously, the Department of Commerce announced that the US economy rebounded more than expected, with a Growth Domestic Product (GDP) increase of 2.6%.

In uncertain economic times, employers are forced to prepare for at least two possible scenarios:

• If the job market remains tight, employers must review their salary budgets to ensure new offers and raises are competitive.
• If a recession gains traction, employers may need to pivot towards a more affordable total rewards strategy to attract and retain talent.

Regardless of which scenario is more likely, vigilant employers will prepare for a recession and continued inflation by "recession-proofing" their compensation packages.

The Bottom Line

All eyes are on 2023, but conflicting reports will likely continue to obscure the view. Employers must brace for the growing likelihood of recession, but they shouldn't ignore the numbers…and the numbers say: compensation will increase, one way or another. It's up to employers to decide how they'll do it.

Additional Resources

Employee-Friendly Labor Market Likely to Continue Despite Inflation