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How HR help the Company Keep up with Compensation Strategies in an Inflationary Economy?




HR should review compensation strategy to keep up with inflation


Employers nowadays struggle to consistently provide competitive benefits and compensation systems to their employees, particularly in the post-pandemic inflationary era.


In a perfect economy, employers would not be forced to pay all their employees more, and employees would do their jobs primarily out of genuine desire. But unfortunately, that is not the world we live in.


There have been many uncertainties and challenges over the past two years, including closures, stringent health regulations, and a global financial crisis.


Compensation strategy can help the organization create an effective and competitive system. In contrast, setting the wrong compensation strategy that is not in line with the needs of the organization and the HR and business strategies can destroy the organization within a few years and lead to decreased performance and underutilization of employee potential.


The compensation strategy, developed from the HR strategy, outlines the company's position in the labor market, the amount of total cash, the key bonus principles within the company, and the guidelines for setting base salaries.


The compensation strategy must be consistent with the company's mission, vision, and key objectives, as well as with the human resources plan created by HR, because employee compensation reflects what top management expects of them. The company cannot change the compensation packages within a few days, so they remain the same.




Why your company should have a compensation strategy



  1. The compensation strategy establishes defined boundaries for managers and employees and helps the company manage its personnel costs. It provides management the assurance that personnel costs are under control and will not skyrocket.

  2. The compensation strategy establishes clear priorities for developing or redesigning compensation components and serves as the foundational document that guides compensation and benefits activities.

  3. The compensation plan gives confidence to the human resources department because it can guarantee the stability of compensation, the strength and regulated growth of compensation components, and describe the basic functions of each compensation component.

  4. Although employees should be informed about the compensation policy and how they can earn more with bonuses and other extras based on their performance reviews, HR is not there to directly communicate the company's compensation strategy. Thus, they should not be informed about how the company is performing in the job market in general or what compensation components are used to attract potential employees.

  5. Employees are free to study the policy that details their compensation when salaries are recalculated. However, they should not learn about the strategic compensation components that contribute to the company's competitive advantage.



How to tackle compensation considering inflation



More than 40% of employees expect wage increases of more than 6% in 2022. It is because of the surging rates at consumer price index (CPI) that is also known as inflation.


They believe their income will allow them to afford necessities and feed and clothe their families. However, a recent survey found that only 45% of American companies factor inflation into their salary budgets.


Although half of companies plan to raise salaries for some or all employees, others risk losing employees if they do nothing. They are reluctant to pay salaries based primarily on the increased cost of living rather than the cost of labor. The problem is that companies do not disclose to potential employees and applicants how they set their pay packages.


Some companies prefer to introduce retention bonuses or improve dental and medical benefits to close the gap between inflation and compensation.


For some companies with budget problems, it would be okay not to raise wages by 10%, especially given the many uncertainties such as the supply chain, high inflation, increased interest rates, and the predicted recession.


Both inflation and wage adjustments are complicated. But your CHRO needs to have a plan to deal with the situation and make sure job seekers and applicants know what's coming.



Evaluate what you can offer


The ultimate way is to increase salaries by at least the rate of inflation and show that your company can keep up with the job market and take care of its employees when you are doing well. This is also best for retaining your high-performing talent and for the overall morale and motivation of the entire workforce. On the other hand, only some companies can offer wage increases during the inflationary economic period.


Analyze your company's expenses to determine if you can afford increases and how much they will cost. Some companies base this on factors other than inflation, including employee performance, business needs, and salary competitiveness.


Consider the best strategies to support your employees and their situation. Let us say the company's budget is not enough for a salary increase. In this case, you can offer alternative benefits, such as more flexible hours, work-from-home or hybrid work arrangements, or assistance with student loans for employees who are also students.



Different compensation strategies that could help your company during inflationary periods



1. Explain your compensation philosophy.

It is advisable for companies to have a clear compensation philosophy to help them make hiring decisions. A philosophy encompasses how a company views its leadership, personnel, and position in the marketplace, as opposed to a plan, which can be either short-term or long-term.


A company's principles and values form the basis for its compensation philosophy and the design of its current compensation framework. In addition, the mindset allows flexibility as the market changes from one that favors employees to one that favors employers.


Any compensation philosophy should directly support the company's objective and not dilute the broader corporate vision.


In addition, experts advise against developing a compensation philosophy in response to changing economic conditions and wage inflation, but rather one that serves as a framework for various long-term compensation decisions.


If leaders in an organization or company are having a hard time articulating their compensation philosophy, or if the approach to employee compensation is driven by a "we have always done it that way," it's time to consider developing a new strategic compensation philosophy.

Companies should consider providing the necessary time and outside help for this process. To give the final philosophy polar reach and context, leaders need to involve all company stakeholders in the discussion.



2. Communicate the compensation philosophy.

Regardless of the industry, companies must also communicate the philosophy of terminal dues through stakeholder engagement.


The key is communication. A company's compensation structure must be appropriate, and leaders must strategically communicate this information at all levels of the organization. Existing and prospective employees can better understand your full employee value proposition and comprehensive compensation strategy when they learn about your compensation philosophy.


Be sure to fully explain your compensation philosophy and any changes or additional benefits. Employees, including executives, may not understand their benefits package, or they may only pay attention to the most prominent part of it: the money in their paycheck. The value of the company's total compensation package must be successfully communicated by HR and the communications teams.



3. Make a strategy for retention compensation.

A well-defined compensation philosophy should include retention strategies as well as recruitment techniques - attrition leads to lost productivity in addition to recruiting and onboarding expenses.


According to a 2017 study by the Society for Human Resource Management (SHRM), replacing an employee typically costs six to nine months of their salary. Depending on the employee's level of employment or area of expertise, the cost can be more than double their annual salary.


Many of the qualities that attract new talent are also valued by current workers. These include the potential for job growth, flexibility, and fair and attractive total compensation and benefits packages.


A solid retention plan should be an essential part of any compensation philosophy, as it reduces the need to recruit new staff through open competition.


Employers must invest strategically if they want to attract and retain the best talent. To compete for talent in a time of economic uncertainty, a compensation strategy based on the right data and methodologies is essential.



4. Additional Salary Reviews

Even if you can not implement salary increases immediately, things could change for the better in the future. Conduct regular salary reviews and budget evaluations to see if you can increase pay, offer bonuses or improve the benefits package. It also shows your team members that you are committed to keeping up with high inflation when possible and that you are aware of the increased cost of living.



5. Work from home

Consider implementing remote work arrangements today if you have not done so by 2020. Most employees love working from home and its different variations, such as the hybrid structure. Not only can they enjoy the privileges associated with working from home, but they would also be able to achieve a better work-life balance and reduce commuting expenses.



6. Strive for work-life harmony.

Many worries and uncertainties about the future are currently causing great difficulties for workers. Set realistic work hours, avoid contacting them on weekends, and give them tasks that match their job descriptions to ensure that excessive workloads are not among their concerns.


Although the pandemic may end sooner than it did a year ago, 2022 will still be uncomfortable and stressful due to money issues. Consider changes in compensation to ensure workers can afford what they need for a healthy life and to keep pace with inflation.



7. Study the market

Studying the labor market through your HR should be an ongoing process that requires accurate, thorough, and current data. To remain competitive, improve pay equity, and retain the best employees, you need to regularly review your compensation for your sector, region, and positions.



8. Prepare for the remainder of the year.

A difficult moment is made much more difficult by supply chain problems, world politics, and inflation caused by pandemics. Coping with inflation can lead to recession. And as people reevaluate their priorities and their jobs, the labor market is tight and could stay that way.


You can improve transparency for your employees by reevaluating your compensation philosophy and plan. The efforts of HR professionals show them that you care about them, that you have done your homework, and that you are doing everything you can to be fair. It's also easier to provide raises and other benefits that individuals may need or want, and that do not break the bank, when you have a clear compensation strategy.


Employees believe that their companies should raise their compensation significantly to maintain their real purchasing power in the face of the current rise in inflation.


Most people assume that the current level of inflation will last only for a short time, although it may take the Federal Reserve and other central banks several years to stabilize the economy.


Many companies fail to make it clear to workers that wages are based on the cost of labor, not the cost of living. When inflation rates rise, this failure leads workers to have irrational expectations.


They see the effects of inflation immediately, so it is only logical that they want to reduce it or offset it with more income. However, it does not make economic sense to manage salaries based on inflation rates.


The macroeconomic indicator of inflation has different effects on people and businesses, and it is undoubtedly beyond their control. Those who drive cars a lot and those with lower incomes who spend a larger portion of their current income on heating their homes are more affected by gas price increases.


It is challenging to mitigate the effects of inflation by managing pay grades because they mean different things to different people. It is unlikely that an employer would consider adjusting the salary of its employees based on their commute times.



Future-oriented approaches


  1. Check to see if management has made it clear that labor costs determine base salary levels and that inflation cannot or should not affect base salary rates.

  2. Employees will assume that they should receive a salary adjustment based on the higher rate of inflation or the higher rate of increase in the competitive wage if they are not told about it.

  3. Trying to meet this expectation will unnecessarily drive up fixed costs, which will harm the financial future of the company.

  4. Labor markets are now unstable, and employers are under greater pressure to take action to mitigate the effects of the recent surge in inflation.

  5. The choice of this answer must be appropriate for the particular situation in which each company finds itself. No one can have the perfect solution.



Conclusion

Human resource managers should develop strategic compensation programs in times of inflation and uncertainty. The task is to strike a delicate balance to sail the company through the uncertain future, retain the high-performing team members who are the backbone of the company, and attract the best talent.


Raising wages to compensate team members for the rising cost of living due to high inflation is the best solution. However, many companies do not have the financial resources to do this. Consider other perks and privileges to convince your team members to stay and work with high morale and motivation.




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