With the Consumer Price Index placing Canada’s rate of inflation at 7.6% as of September 1st, 2022, there is no question that many Canadians are experiencing a growth in prices that is faster than during any other time in their working careers. Couple that with the job market fluidity brought on by the “Great Resignation,” and many HR Managers are left wondering how they should shape their Compensation Management strategies in response. Judy Butterworth is an independent Compensation Consultant who has partnered with businesses around the globe for over 30 years. Judy helps employers develop strategic approaches to Compensation Management that balance employee engagement, market conditions and fiscal responsibility. Judy works with the team at Cenera to help advise HR Managers across sectors on how to best structure compensation programs to meet business goals.
With so many years of experience, Judy is no stranger to economic turmoil, so we knew she’d be the perfect person to discuss how HR Managers should respond within the current environment of rampant inflation when considering employee compensation.
Hi Judy, it’s great to connect with you today! We’ll cut right to the chase here; should HR Managers be taking inflation into account when considering compensation?
It’s a great question. Compensation and benefits are typically one of the of the biggest expense items in your organization’s budget. And, of course, inflation impacts all kinds of different business costs, so it’s always a balancing act. In my experience, knee-jerk reactions to anything, whether it’s interest rates, inflation, economic downturns, or whatever, will not serve your organization well.
Everything needs to be contextualized—and I recommend that the first thing to do is to look at your current state—are there employees who haven’t seen a salary increase in a long time? Has it been a while since you looked at the pay ranges for your industry? Are there high-performing team members who deserve to be acknowledged through promotions or pay increases? Get your house in order before considering further changes.
You’ll need to make salary increase decisions within the context of your business and not just as a reaction to outside market forces. The bottom line is that locking in salary increases raises costs significantly, and if that’s not sustainable for your business, that could mean people losing their jobs down the road.
As HR Managers, our role is to ensure employees feel their value to the organization is properly compensated. Of course, we always want to be able to give raises- I’ve never met an employer who doesn’t want this- but HR Managers need to consider the whole picture. A pay increase will be diluted from withholdings (like tax, CPP, and EI), so what is the actual net benefit to the employee? An across-the-board salary raise has other ancillary costs to the business, too; for example, annual bonuses are often based on salary levels, employee insurance premiums can be affected by coverage levels set as a multiple of salary, etc., so there are knock-on effects. If a blanket raise is affordable and you want to do it, great, but tread carefully and know what your ancillary impacts might be.
At the same time, we also know that turnover costs are much more expensive than retention—so there is absolutely strategic value in working to keep employees. Ultimately, it’s all about the return on your compensation spending investment, what makes sense for your business, and your ability to take on those cost burdens on a go-forward basis. What costs can you manage? Work backwards from there.
For companies who haven’t done a compensation review or provided raises for a number of years, what is the best approach in order to catch up?
Don’t do it all at once. We know that when people receive pay increases, the positive impact tends to dissipate over a fairly short period of time, so a one-time big raise isn’t necessarily strategic. It’s also not sustainable, and you don’t want to set unrealistic expectations for employees the next time you do salary raises.
The timing of inflationary pressures coming out of the business stagnation of the pandemic has exponentially impacted everyone. Many companies put salary increases on hold over the pandemic, and if that’s the case for you, it’s likely time to re-visit your compensation. Call your local compensation expert; they can help! They can give you strategies, tools and ideas that you can action as an HR Manager. It isn’t about re-designing; it’s about strategic actions that will make the biggest impact on your organization based on where things are for you today.
We’re seeing so many costs ebb and flow- this is what the economy does. Yes, this is a volatile time, but I’ve been doing Compensation Management long enough that I know the economy, in general, is a rollercoaster and can change on a dime. It’s important to keep the longer-term business view in perspective. The bottom line is you don’t want to unnecessarily embed exponential business expenses to address what may be a transitory problem.
Are there strategies that HR Managers can use to help employees better manage the impacts of inflation?
Absolutely. It’s really important to encourage an open dialogue about this. If you know where and why people are struggling, there may be some relatively easy solutions that could make a big difference.
For example, maybe the cost of childcare has skyrocketed, so could allowing employees to work more from home help reduce those costs? Some businesses have access to financial planning experts, so are there services you can connect people with to help them better manage money? Could you cover their employee-paid premium costs for their benefits? That’s money in their pocket and an expense the business can write off. Many people aren’t taking vacations right now due to the hassle of travel, so could you offer employees to cash out their vacation pay instead? You could provide grocery cards, gift cards, gas cards, etc.—these all have an actual value to an employee to help deal with inflation without adding the burden of ongoing costs to your business.
In an era of rapid inflation, no raise is actually just a decrease in pay – true or false, and why?
Whenever you change someone’s salary, it’s often based on yesterday’s information. It’s hard to stay ahead of the curve, so whether it’s an increase or a decrease depends on the day you’re looking at it. Employers also need to think about the total value they’re providing employees. There are so many things that go into an employee value proposition beyond cash.
I don’t believe employers can or should ensure their employees have the right purchasing power in a given moment in time. When we give salary increases during periods when interest rates are low, we’ve actually increased purchasing power—but no one talks about that part of the equation. Effective compensation management is about ensuring that each employee is receiving the right compensation based on the value they’re bringing to your business and the job market conditions your business is facing.
For businesses that aren’t able to provide a raise, I imagine the question of how to communicate that becomes really important?
So true. Sometimes it’s more about an internal communication issue than just a pay change issue. Open and transparent dialogue about compensation can go a long way. If you’re unable to give your employees anything material in compensation change, tell them why, give them the facts, show them the balance sheet, talk about what is realistic. If we raise costs above where we can manage the business, we may have to lay people off, and no one wants that.
Ultimately, it’s about being human and being honest- because if people don’t have that information, they tend to make it up, and all of a sudden, your employees have beliefs about compensation that are based on opinions and rumours, not facts. That’s why a Compensation Management strategy is so important. If you’re just chasing after the economic ups and downs, that’s a wild ride—you wouldn’t make any of your other business decisions that way; why do that with compensation?
I recommend organizations create opportunities to have open and ongoing discussions with their employees about compensation. The key is to have a solid and consistent message behind every dollar given so employees know where they stand and can make the decisions that are right for them.
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