How To Plan Salary Raises Over the Backdrop of Inflation

As a small business owner, you likely had to contend with the pandemic’s effects on supply chain logjams and increased turnover. Now, you’re also facing historic inflation — and so are your employees.

 

How can you take care of both your business and your workers when costs have risen so sharply? While considering this question, remember the adage, “You get what you pay for.” It may prove especially true in a tight labor market when other employers could gladly pay your best people more.

 

Retaining your best employees is more efficient and cheaper than recruiting, hiring and training new people who may not stick around. Now is the time to take a close look at your compensation plans and decide what you can do for your employees in the coming year.

 

For years, the standard cost-of-living raise has hovered between 2% and 3%, according to the Bureau of Labor Statistics. But that’s all about to change. When inflation rates reach into the double digits for essential items like food and energy, a small salary bump just won’t cut it for employees. So how can business owners determine what kind of raise is appropriate, especially when business costs have also increased across the board?

 

If you’re concerned about this, you’re not alone. The Society for Human Resources Management (SHRM) surveyed 1,150 HR professionals, and 73% said inflation was a concern at their organization. Nearly 90% said their top concern was how inflation would affect their employees’ lives.

 

While medium-sized businesses have historically been more likely than small and large businesses to make annual salary adjustments for increased cost of living, the tide is changing. This year, small business owners are leading the charge on pay increases related to inflation. In fact, 76% of those surveyed by SHRM said they’ll factor in inflation while planning pay raises for next year.

 

Due to fierce competition for talent, wages rose at higher rates in 2021 and 2022 than in previous years. But those wage increases haven’t kept up with inflation rates. Businesses that fail to further increase employee compensation will risk hurting their employees’ quality of life or losing workers to other companies.

 

To keep morale high and avoid turnover, consider ways you can offer adequate salary increases. You may have to get creative when it comes to compensating your workers.

 

Some employers are looking into improving their benefits packages, including offering more family-friendly support such as parental leave and subsidized childcare — options that can prove tricky for small businesses. Consider offering incentives like grocery and gas gift cards to help employees with their highest household costs.

 

Just remember that while these occasional gestures may be thoughtful, a pay increase will go further to provide employees with peace of mind. As you consider how much to increase wages for your workers, here are some factors to consider.

 

Monitoring your competition is always important — and that includes gathering market data for employee compensation. According to the National Federation of Independent Businesses, 32% of small business owners plan to raise compensation before the end of 2022. Research what similar companies are paying their employees, how often they give bonuses and what their annual raises look like. Networking with small business groups in person or online can help. You may also be able to find pay data on sites like Glassdoor or Salary.com.

 

If pay raises above 3% are out of the question for your business, consider whether you can offer regular bonus opportunities. Reworking your bonus structure can be a good way to keep regular business costs under control while still increasing compensation for employees. Whether you’ve traditionally granted annual bonuses or bonuses are a brand new benefit for employees, consider setting up a monthly or quarterly incentive program. This structure empowers people to earn additional money based on incentivized activities and behavior that also helps your business succeed. It’s a win-win for you and your team.

 

Most employees understand that inflation is affecting not just them, but also your business. Some may even see evidence of that in their day-to-day work. Trust them to know your struggle and be transparent about your pay budgets when discussing increases to salary. If your salary increase budget only allows for a 4% increase across the board, for instance, explain that to your employees. Be open about how the business is doing. When employees can see that you’re making a genuine effort and offering transparency, you’re more likely to earn their loyalty.

 

During performance reviews, give employees clear criteria for how they can earn a pay raise. Doing so helps keep the process fair. It also gives employees confidence that pay increases are objective and that they can affect the outcome with good job performance. By making this criteria clear, employees will understand why they have earned a raise or how they must improve to receive one next time.

 

While better job performance can be fairly tied to higher raises, aim to consistently adjust employee compensation both in amount and timing. In general, award raises to all employees at the same time. That said, if an employee gets promoted or takes on additional ongoing responsibilities it would be defensible to give a raise to just that employee at that time.

 

Whatever you do, be careful that you don’t appear to be “playing favorites.” If one employee receives a lower raise than another in a similar role, make sure you can clearly and objectively explain why; being transparent ahead of time about how to earn raises will help.

 

When determining employee pay, it can be helpful to have some benchmarks. Until mid-2020, the average pay increase per 12-month period in the U.S. was between about 2.4% and 3.2%. In 2021, however, that increased to 4.2%; by September 2022, wages increased by 5.1% year-over-year.

 

Average salary increases rose more steadily in 2022 than in past years. Not only that, but in reaction to steeply rising inflation, many employers didn’t wait for traditional end-of-year performance reviews to issue pay raises.

 

While traditional pay increases hover around 3%, inflation rates have been much higher. This means that, even after getting a 5% raise, employees’ buying power would still be lower than it was a year ago . Keep today’s higher cost of living in mind when planning your year-over-year percentage increases for employee pay. Compensating employees fairly is more important than ever. After all, if your employees’ raise percentages don’t keep up with inflation, you may see more of them switching jobs.

 

Nearly all indicators show that salary raises in 2022 are likely to trail inflation rates, which landed at 7.7% by mid-November 2022. Essential items like food, gas and utilities saw even higher inflation rates in the double digits. Still, many businesses have already made pay adjustments, and more stand ready to announce large 2023 salary increases. According to a report by Salary.com, about 25% of employers plan to forgo traditional 3% increases, instead raising employee pay by 5 to 7% in 2023.