How Historic Inflation is Impacting Compensation

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Related Resources:

• Employee Benefits Every Employer Should Offer
• Reduce Employee Turnover
• Presenting a Compelling Compensation Package
• 5 Things to Know About Salary Transparency
• Episode 5 – Compensation Beyond Cash
• Episode 7 – Complying with California's New Pay Transparency Law

SPEAKERS

Kevin Plunkett, David Turetsky

 

Kevin Plunkett 00:03

One word, inflation, as if recruiting and retention these days aren't hard enough. And all that hard work we did to increase wages coming out of the pandemic has been completely nullified by, you guessed it, inflation.

 

David Turetsky  00:20

And one of the things that I think has been a misunderstanding in the world of compensation management is that merit increases have to stay in line with inflation.

 

Kevin Plunkett  00:31

And I'm pretty sure your employees see things a little differently.

 

David Turetsky  00:35

I feel underpaid, I don't feel valued. And therefore, I'm going to, I'm going to at least look at other opportunities outside, and will they find that pay increase? Well, we just saw today that Microsoft increased their, their budgets, they say, they've come out and said, they're, they're doubling their pay budgets for 2022. To be able to deal with this. Not every company is going to be able to do that.

 

Kevin Plunkett  01:01

We don't all have Microsoft size budgets.

 

David Turetsky  01:04

So what do I do? And the answer is, Don't do anything rash. Don't kill your margins by giving increases that are unwarranted or unnecessary?

 

Kevin Plunkett  01:14

How exactly does throwing money at the problem make it worse? It seems counterintuitive.

 

David Turetsky  01:19

Just try and throw money at the problem. You're exacerbating an issue.

 

Kevin Plunkett  01:23

How exactly does throwing money at the problem make it worse? It seems counterintuitive.

 

David Turetsky  01:28

And so you get this compression, where you get the non exempt roles getting paid more. And then the supervisory managerial roles not seeing that much of an increase, and therefore, the compression between those levels.

 

Kevin Plunkett  01:41

That seems a little confusing. How do you explain that to an employee?

 

David Turetsky  01:46

Because you don't want to start talking HR to people you want to talk their language,

 

Kevin Plunkett  01:50

Okay, like what?

 

David Turetsky  01:52

A lot of organizations are actually utilizing things like signup, bonuses and other types of short term incentive to incentivize people to come and stay. And I think another thing that I applaud organizations for doing this for paying for training or paying for education,

 

Kevin Plunkett  02:10

These are concepts that are easier to explain, because they've been around for a while, there's a lot of pressure to come up with the right solution for your organization.

 

David Turetsky  02:19

And the way to deal with that pressure is to do research and to figure it out. And if you haven't developed or redeveloped your pay strategies to be transparent, you're going to have to open that up a little bit and open the box and be able to start communicating with people as to how things work.

 

Kevin Plunkett  02:35

So this is something you need to stay on top of.

 

David Turetsky  02:39

There are things you have to do all the time, like taking a shower or a bath or brushing your teeth every night morning or changing the batteries in your smoke detector every six months. The thing you cannot do is just ignore it, close your eyes and will go away.

 

Kevin Plunkett  02:52

We all want to practice good compensation hygiene, right? So grab a towel or a toothbrush, because we're going to clean up this mess inflation has created for your employees. Right here. Right now, on the Get Pay Right podcast. From the Salary.com studio in Waltham, Massachusetts, this is Get Pay Right. The podcast that dives deep into the current compensation topics that matter to you most. So you can get it right. Every time. Inflation is at a 40 year high. Are you feeling it? I mean, certainly your employees are in a recent salary.com pulse. percent of the company said their employees have shared their concerns with their managers, HR folks or leadership team. I mean, just wouldn't you thought you had a handle on the great resignation. Now inflation? Aren't the labor markets tight enough? Here to talk about the challenges is David Turetsky, Vice President of Consulting here at Salary.com. Just when companies are getting a handle on salary adjustments caused by the pandemic, and now we've got employees telling them these adjustments aren't enough because of inflation. What's your company's supposed to do?

 

David Turetsky  04:14

Hey, Kevin, it's a great question. And one of the things that I think has been a misunderstanding in the world of compensation management is that merit increases have to stay in line with inflation. Yes, we do try and index our merit increases with what's happening in the market. And, yes, inflation is at a 40 year high with eight and a half percent that we've seen, it will cause lots of pressure on people. And that pressure in on employees is going to translate to what are you going to do for us when it comes time for salary increases? Now a lot of companies have just gone through their salary increase cycle. And so they're now kind of saying what are we going to do? Well, we just saw today that Microsoft increase their, their budgets, they say they they've come out and said they're they're doubling their pay budgets for 2022. To be able to deal with this, not every company is going to be able to do that. And so it is going to cause a lot of stress, basically a lot more of the great resignation, a lot of people are going to say, I just only got 4% or 3%. It doesn't keep me whole with inflation. Again, as I said, That's not exactly what it's supposed to do. But then they're going to want to walk from this.

 

Kevin Plunkett  05:33

So I should have you introduce yourself, give a brief introduction. I mean, obviously, I know you quite well, but not everybody else does.

 

David Turetsky  05:40

So I've been doing compensation consulting, as a practitioner, internally consulting, as well as externally consulting for over 30 years, mainly trying to utilize technology to help managers make better decisions about their people, by leveraging things that we know and things we don't know, trying to find evidence in the market by looking at statistics to tell us what's happening, and to try and find ways of telling stories to managers and executives about how they can leverage good data about the market that they're working in, to help them make the best decisions, what I like to call business decisions, but business decisions about their people. And so that brought me to Salary.com. And I love working with my friends like Kevin Plunkett.

 

Kevin Plunkett  06:27

Oh, come on, you're on a flatter me.

 

David Turetsky  06:31

It's true, though.

 

Kevin Plunkett  06:33

But I mean, look, the state of the economy. Everybody's mind, right. You mentioned the inflation issue and the Federal Reserve, you know, where interest rate hike, we've got midterm elections coming up, you know, I suspect and inflation and, obviously, cost of living, etc. How long do we think that this sort of will impact us kind of moving forward? Is this something that's just temporary? Is this something that's going to be around for a few years? Do we have a sense for that?

 

David Turetsky  07:06

So that's a great question. And just like other cycles, economic cycles, it lasts for a period of time, we go through highs, and we go through lows, and this is going to lead to a recessionary period that we've lived through before and come out the other side. And what it tells us is that as we live through a recession, we tighten our belts a little bit, we spend only on the things that are most necessary, and we keep going, this isn't the first time we've faced increased prices. What is different about this time is it's increased prices in areas that will cause other prices to rise, like gasoline and diesel fuel, going up causes a ripple effect across the market. Even the avian flu, killing 27 million chickens just recently caused the price of eggs as well as chicken and other meats to go up as well. So these are things we just have to deal with, and be able to find ways that we will suffer through it and be able to get out the other side, it does cause severe stress to employees. And that level of stress then translates to employers and employers say, What do I do? And the answer is, Don't do anything rash. Don't kill your margins by giving increases that are unwarranted or unnecessary, giving sour increases compounds, your fixed price of your goods going forward. And there are lots of other things that can happen to be able to help alleviate those pains and pressures that don't increase your fixed costs going forward.

 

Kevin Plunkett  08:39

If I mean, you know, sitting in the seat of HR, it's, it's probably to react to the various fluctuations or things you're seeing out in the market. Right. I mean, we are being bombarded by information every week about something going on with the economy, you know, so our employees, and we just went through really tough times for employers and employees, right. And folks, as you mentioned, went through the process of, you know, looking at salary increases, and maybe probably looking at structures in the like, you know, for those that were very proactive and got a handle on it, they probably feel why did we bother? I mean, we're, you know, back in the same boat again, I mean, I don't mean to sound pollyannish about this, but it sort of feels like, Oh, my God, how many hits can we take?

 

David Turetsky  09:28

It's true, but I think, to answer to answer that point, I think it's the companies that haven't done that research. It's the companies that haven't done that work, that have a bigger problem. If you're in this is always the case in compensation. If you just try and throw money at the problem, you're exacerbating an issue. But if you take a thoughtful approach to I'm going to look at the market, I'm going to see where my labor market has shifted. I'm going to look at my salary structures and look at the cost structures underlying how I pay people and make sure that it represents what is accurate in the marketplace today, by doing your appropriate market pricing by rebuilding your structures or just re re evaluating your structures, then what you've done is you can tell your employees that you're being paid fairly for what the market is doing today, how the market shifts and reacts, yes, those are things that we will get to. But having a good strategy for being able to communicate to employees that we've done the analyses, and we're being transparent about it, that we're paying at market rates today, gives them at least the comfort level that you've done the work, and that you're not just reacting and telling them, I'm not going to give you more of an increase. That comes from a position of strength, in the communication of I've done the work, I figured it out. And here's where we're going to need to make target increases. But across the board, we think we're okay.

 

Kevin Plunkett  11:00

And what are kind of, like for those folks that maybe haven't fully addressed this, what is a good first step in order to get started on that pathway? I mean, the tight labor market, I don't see relenting anytime soon, you know, even even in the face of a recession, I think we're, we're still gonna be fairly tight on the labor markets. So that pressure, you know, is large just going to have to learn to live with and deal with and manage. So what do you do?

 

David Turetsky  11:28

Exactly. And the way to deal with that pressure is to do research and to figure it out, and to make sure that we understand what areas we have that are weak, and what areas are we strong in and be able to make sure that as you're communicating to your employees, and over communicating to your employees, about what position we're in, and where we have areas of strength and weakness, that you can make sure that it's backed up by facts. And I think that's where they need to actually start is work with the leaders to have a pay philosophy that supports transparency. And that enables all of the managers to understand what the rules are, and all the leaders to understand what the rules are. And then to come out to all of your employees and say, here's how we do what we do in compensation. Here's how we study the markets. And here's how we make decisions around what our budgets are, and how we actually look at the areas of strength and weakness and go after them. If you don't actually go out and tell them proactively in a very transparent way, and you keep the methodology of managing compensation in the box, then you're going to get those people who feel stress and say, I don't know how you do this, you don't tell me how you do this. And therefore I feel uncomfortable, I feel underpaid. I don't feel valued. And therefore, I'm going to at least look at other opportunities outside. So to me, it comes down to being transparent and making sure people understand you're doing the work.

 

Kevin Plunkett  13:05

And should you be paying attention to sort of cost of living and what adjustments are happening there? And is there anything you could do or should do relative to that?

 

David Turetsky  13:17

The cost of living adjustments are great for certain roles, where cost of living adjustments are focused on being able to provide a market indexed pay increase based on pre agreed rules. It's not for all jobs, it's for certain jobs, merit increases are actually how we usually address cost of living adjustments. And merit increase has the attachment of having that pay for performance methodology built into it. The problem is, is that for most organizations, they are only targeting like four or 5% increases at a budget. And when you start to actually give that out. And you know, even at the highest end of that, with the highest performers getting the most, they're probably not going to get more than a six or 7% increase, unless you're giving a lot of zeros. And therefore, it's probably not going to be the case where many people are getting an at inflation rate, they're probably going to get much less than inflation, which again, if you're communicating how you're doing things and why you're doing things, and you're not trying to make up for inflation with your merit increase, but you're trying to help make sure that they understand that it's based on what the market is doing, then then that will hopefully successfully answer the question for for employees.

 

Kevin Plunkett  14:40

And do you take the same approach for hourly jobs as you would salaried positions? Or do you have to do you have to think about those slightly differently?

 

David Turetsky  14:48

I think in compensation, we've always thought of them differently. We've always thought of executives and professionals and hourly roles separately, and we've tried to look at what them marketplaces doing. Fascinatingly, I think that the market for non exempt hourly roles have been more under pressure lately, especially from new entrants, like Amazon and others in lots of different areas where the manager or the professional, managerial, haven't seen as much pressure from the market. And so you get this compression where you get the non exempt roles getting paid more. And then the supervisory manager roles not seeing that much of an increase, and therefore, the compression between those levels. And so yeah, I think that what we might actually see this year as merit increases for non exempt getting higher than the exempt and the executive roles. But that hasn't actually borne out in the surveys, the surveys see them as all the same, which I'm a little disappointed in. But it's not surprising. Keeping those numbers similar at those three levels has always kind of been on track for at least the history that I've seen.

 

Kevin Plunkett  16:02

But I mean, that trend, not showing up in the numbers just could be the natural leg of surveys versus the market, right?

 

David Turetsky  16:10

It absolutely could be and Salary.com has tried to do, they've done a really good job of being able to stay ahead of that by doing intermediate surveys that kind of test the waters of how have merit market adjustments changed, given the market dynamics. But I still don't think if I've, if I remember correctly, Kevin, I don't think we've seen mass differences or gigantic differences between the non exempt exempt and executive roles in the different budgets.

 

Kevin Plunkett  16:39

My assumption is organizations are feeling more pressure on the non exempt. Absolutely, because that seems to be the segment of the population. That's that has been hurt the most generally in the last few years. Right? Absolutely. So the same ones that, you know, are getting hurt. I mean, what do you do, it's a tough adjustment, right? It feels like you're gonna, you're here between keeping that population happy yet, staying within budget. So you're not, you know, adding to increase cost to your customers.

 

David Turetsky  17:11

I think it also comes down to what we're doing outside of just pay, right, because there are other things that companies have been trying to do for workers to keep them whole, like, for example, being more flexible on working arrangements, or time being flexible about hybrid work in the office or outside the office. For those roles that don't need to be at a location, I think companies are trying to be more flexible, even for companies that have the need and bringing people back into the office, they're trying to be more flexible around not just the attendance but also trying to be flexible around how they support those individuals with other types of whether it's fringe benefits or or even their their PTO policies to be able to make sure that those those types of workers can take care of the things that they had gotten used to during the work from home period, or from the periods that they're actually on sabbatical.

 

Kevin Plunkett  18:10

And is variable pay an element here that come into play for some of these roles?

 

David Turetsky  18:15

Think that variable pay has always been a really good way in a short term basis to be able to reward performance, I think what will be fascinating to see is how the performance of organizations and how they fund their variable pay programs are going to work in an era of recession. I mean, yes, some companies have paid them out anyways, as far as the traditional variable pay programs, I think they're going to be pretty steady. But a lot of organizations are actually utilizing things like signup, bonuses and other types of short term incentive to incentivize people to come and stay. Because of course, a sign on bonus has a lag to it, it has a tail to it, where if you leave within a period of time, you have to actually pay it back, which could be harmful to people, if they try and have to, you know, give back a sign on bonus after after a period of time. And I think another thing that I applaud organizations for doing is for paying for training or paying for education, which increases the skills of those workers that even if they are paid today, at market, one of the things we always see is that skills evolve. And if the people don't evolve in those roles, then they're not going to be as useful as if they were taking training and being able to expand their horizons. So I also applaud organizations for the increased budgets in learning development programs, as well as for paying for the expense of either third party, your university education for those people in organizations to get rescaled and upscaled.

 

Kevin Plunkett  19:54

And culture right is another one. We've talked about in other other aspects of this as podcasts or other podcasts, I mean, if you haven't spent time on your culture and working on your culture to make your working environment attractive and engaging and communicative, all the money at the money in the world at about a problem that just still won't fix the problem.

 

David Turetsky  20:17

Yeah, as I mentioned before, you know, pain transparently is not a process, paying transparently is a philosophy. And it means you may have to throw out a lot of old process, because the new process needs to see the light of day, and you may not want to expose some of those things that were done in the box, you may want to redevelop them and make sure that the leaders understand them, the managers understand them, and that the employees can consume them. A lot of times, we use a lot of words in like compression, in HR that employees probably don't understand, nor do they care about. But you need to find ways of explaining things to them, that makes sense to them, and that they can buy into, because you don't want to start talking HR to people, you want to talk their language, you want to communicate to them effectively. And when you start paying transparently, and you start acting more transparently, and your culture changes to do that, you need to find a new way of being able to relate to people. And I know it's hard for HR sometimes. That's cool. Yeah.

 

Kevin Plunkett  21:20

Well, it's also the line managers do, right? I mean, a lot of that pressure on responsibility falls on those line managers that, you know, aren't always equipped to have those conversations. Exactly. They're a just because it's their personality and are comfortable talking about it or be they just don't fully understand it themselves. And so educational, line managers around how to have that conversation, I think is a really key key thing to think about.

 

David Turetsky  21:46

Absolutely. I think we've set we in HR have set those line managers up for failure, because we kept so many things secret from everybody else that we we didn't give them the tools to be able to, or the script, at least, to be able to have good conversations around pay and why we did things. And that's why we always heard that, it's because HR made me do it. Or I come sorry, I can't do this, I really want to do this for you. Because I you know, I like you, you're a good person, and you're a really valued member of the team. But HR won't let me well, those things go away in an era of pay transparency, because the rules are now open, and people understand them. And so it will come with education, then intestinal fortitude, that managers will be able to get the right script, and be able to get the right training to feel comfortable and have the conversations that in the past they used to just blame on us.

 

Kevin Plunkett  22:41

Alright, so listen, what if you had to have a toolkit or a tool belt? Right? And you're gonna give it to an HR manager around how to deal with these? And inflation and the like, what what are the five things you sort of have in your tool belt? at the ready for for somebody that has to deal with this problem internally?

 

David Turetsky  23:03

I think that's a great question, I think the first thing I do is start with my CFO, and develop a framework as to why we pay what we pay, and what is our budget, and how we can. The second thing would be once we understand the budget and understand what we can spend for 2022. Then the second thing is to have a communication framework designed as to how you're going to communicate what you can communicate. And if you haven't developed or redeveloped your pay strategies to be transparent, you're going to have to open that up a little bit and open the box and be able to start communicating with people as to how things work. And at least develop a communication strategy to enable a little bit of transparency, so that you're getting ahead of this, the thing you cannot do is just ignore it, close your eyes and will go away, you're not gonna be able to survive the recession that way. The third thing I would do is, once you've developed that pay that pay communications framework is, as you mentioned, develop the educational tools to give to managers to understand how that affects them, and how it affects their employees. So that's a very different communications tool. So it's not going to everybody, it's going directly to managers, and give managers the ability to answer back, give them the opportunity to ask questions, and then publish an FAQ of if a manager says something. And then the employee answers. How do you respond? And how do you give them that script? So it's an FAQ and a script. So it's a communication platform. The fourth thing I would do it would be to re look at my structures and do the research to look at your, your market and your structures to make sure that everything is in line and that you're that you fully understand what your liabilities are around. What jobs are hot and what jobs are not? In what locations and have a good framework inside of that, to address them? And the fifth thing would be to make sure we have a plan for how do we emerge from a recession, that a communication strategy gets developed four, if we deepen the recession, if the recession continues, or if the recession ends, and we get a period of growth. Because if we think that the world of the Great Recession gets worse, just by continuing on, it will get worse if either the recession continues, or will get worse, if the recession ends, and we get a period of growth, and then there are more opportunities for people. So how do we emerge from 2022? Is what I'm asking. So the fifth thing would be emerging.

 

Kevin Plunkett  25:50

And I guess the sixth thing if you're if you're going to take all that time and energy to go through that process is a set up some kind of a maintenance program, right, so that you don't have to go backwards, right? You can, you can build, you've done and continue to check in. And I imagine that's probably a piece that probably gets forgotten in the midst slowly. Because the effort to get there sometimes is so it takes a lot of focus and energy.

 

David Turetsky  26:17

Absolutely. You know, in your right, it's not like I forgot, it's just to me, those things are hygiene, they're things you have to do all the time, like taking a shower or a bath or brushing your teeth every night morning or changing the batteries in your smoke detector every six months. You know, it's things you need to do, but you kind of don't do because you forget about them because they should be routine. But I totally agree. I think going and revisiting one through five on a on a regular basis is absolutely hygiene.

 

Kevin Plunkett  26:45

What kind of cadence would you recommend? Is it? Is it a quarterly thing? Is it a monthly thing? Is it a yearly thing?

 

David Turetsky  26:51

Yeah, I don't think we can invest the time on a quarterly basis to do it. My advice is is that you as you're developing your merit, increase budgets, and you're developing your strategies for your end in the September October timeframe, as long as you have a genuine date that you have you start those processes with that CFO meeting, and have that rough conversation with them about what did we or what are we emerging from this fiscal year? How are we planning for next fiscal year so that you can plan for not only your bonus programs that will should pay out, but also the merit increases and getting them ready for also market adjustments or pay equity adjustments or other things? So that you're setting kind of the framework for how much is it going to cost me to operate next year in the areas in which we compete?

 

Kevin Plunkett  27:38

Excellent. So I know we're we've covered quite a bit. I think, you know, if I had to sum something up as far as how to deal with these economic impacts, and inflation is don't have a knee jerk reaction, take the time step back plan and put an action out of not just deal with today's issues, or what we're anticipating will be coming down the road. And I said it better myself. Yes, you did. You said much better earlier. So, David, what would you I mean, any any piece of advice here?

 

David Turetsky  28:14

You've covered it. To me, this is an evolving process. Compensation is never, never done. We're always reevaluating where we are. My advice would be to keep reevaluating.

 

Kevin Plunkett  28:24

Thank you David for joining us.

 

David Turetsky  28:26

My pleasure.

 

Kevin Plunkett  28:28

The Get Pay Right podcast is produced by Kevin Plunkett, Julie Murphy and Megan Nadeau. If there are topics you'd like to hear about, let us know at get pay right at Salary.com. A big thank you to our sound engineer Jay Sheehan of Garrett Audio. Thank you all for listening and make the time to get pay right.