Insights

2022 salary increases: When inflation wants in on the fun!

Analysis
Published on: November 22, 2021
Subjects:  Surveys and forecasts, Total compensation

After all the talk of “recruitment” and “lockdown,” it’s now “wage increases” and “inflation” that may soon create headaches for business executives and HR managers.

Up to this point, preparing to announce this year’s salary increases to your employees had been going so well: you already navigated the murky waters of the pandemic, rode the wave of the economic recovery, reviewed all the latest surveys, devised airtight scenarios and then...along comes inflation. No one had thought much about this indicator in years, but rising inflation has proved cause for concern.

Hello inflation, our old friend

In our latest salary survey, the companies interviewed reported an average 2022 salary increase budget of 2.9% in Québec and 2.7% in Canada. Yet as of October 31, 2021, the Consumer Price Index (CPI) was up 5.3%1 year-over-year in Québec, compared to 4.7% on average in Canada—the largest increase since February 2003, according to Statistics Canada.

The soaring inflation rate is likely to impact your efforts to position your upcoming salary increases. Labour shortages only serve to exacerbate the situation. But before you lose sleep or throw out your 2022 scenarios, take a step back to assess your situation and decide how to communicate the right message, the right way. Here are a few tips to help you out.

1.    Take a deep breath

First, some perspective. Current inflation is nowhere near the double-digit rates of the 80s, and we are also looking at very different economic and job environments. We therefore think any such comparison is unfounded. Let’s also keep in mind that:

  • Inflation affects everybody differently, depending on their income and spending habits
  • Inflation is only one factor in salary increase calculations
  • Wage increases not only bolster pay, but also affect other areas of compensation, e.g. bonuses, group insurance, pension plans, etc. Therefore, the higher an employee’s salary, the higher their total compensation, and the less likely they are to be affected by inflation.

2.    Assess your situation

a. Does your budget consider the full scope of your workforce and their compensation?

There are three possible scenarios:

  1. If you offer a competitive total compensation package and your budget for wage increases is on par with the latest salary surveys2, you’re on the right track. Stay mindful, however, of any employee concerns. When in doubt, quickly get in touch with a consulting firm.
  2. If your total compensation is roughly at market, but you feel certain positions/employees are more critical, handle these on a case-by-case basis.
  3. If you’re proposing below-market compensation (with recruitment difficulties, high turnover, rejected job offers, etc.), you should earmark an additional budget while staying within your means and according to the issues at hand, while prioritizing the positions/employees whose wages need increasing.

Keep in mind that the lowest-paid employees are generally most affected by a high inflation rate. If your salary increase budget can’t keep pace with inflation, then it is all the more important and advisable to use different percentages to improve the situation of the lowest earners.

b. Do you have any budget flexibility?

While workforce demographics are important, more and more companies are also allocating a discretionary budget to close any gaps throughout the year or to compensate employees whose salaries no longer reflect their professional experience or contributions. To free up funds, some companies are going so far as to offer very low raises or no raises at all to average performers, or even to decently performing employees whose compa-ratio is on the higher end, e.g. 110% of their given pay range.

Our findings show that 52% of organizations surveyed have a discretionary budget for non-unionized employees, enabling them to recognize special cases (high-potential employees, fast-tracked employees, employees in jobs with labour shortages, etc.). The additional budget allocated for all of these organizations is 1.2% in 2021 (actual) and 1.5% in 2022 (forecast).

3.    Communicate clearly and effectively

The days of emailing the entire staff to announce their X% raise right before payday are long gone. For the best chances of success, give at least one month’s notice, be transparent and cascade the message properly, so that you not only involve your managers, but also provide them with a complete compensation picture.

  • Hold an initial meeting with senior management and your finance team, and make sure that they understand that certain employees must move up in the salary structure, and that the structure itself should take inflation into consideration.
  • Next, sit down with your managers and make sure that they have a clear understanding of the total compensation package, what message to communicate to their employees and how the salary increase budget was determined.
  • Make your managers’job easier by giving them a simplified, but comprehensive, document that summarizes the budget methodology, core messaging and official responses to the most expected questions.
  • Last but not least, be open and receptive to employee feedback on the announced salary increases and promptly address any of their concerns, especially inflation-related ones.

Key takeaway: Be responsible and agile

There is a lot of talk nowadays about corporate responsibility, and it is reflected in the way businesses approach compensation. Position yourself as a responsible company that acts prudently and reassuringly. Affirm that you are willing to listen, that you will keep close tabs on the situation, and that you may make mid-year salary adjustments for some or all employees.

Remember that there is no one-size-fits-all solution. You need to tailor your approach to your organization and workforce, when it comes to both setting and communicating wage increases.

Let’s continue the discussion…

For any guidance or advice on setting and communicating your upcoming salary increases, please contact us. You can also read our article on the key takeaways from our 2022 Salary Forecast Survey. Updated data available in January.

Authors

  • Marc Chartrand, M.Sc., CPHR Distinction Fellow, ASC, Partner
  • Dominic Girard, Partner

 

Sources

1Since May 2021, the annualized rate of inflation has fluctuated between 3.7% and 5.3%, while the monthly CPI has continued to rise month-to-month since June 2021 (according to Statistics Canada).

2An updated PCI Salary Survey is scheduled for January 2022.

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