Inflation’s Impact on Compensation

Stephen Miller, CEBS has written a three-part series article for SHRM titled “Inflation’s Return Will Affect Compensation.” The first part was published earlier this week on Compensation and the other two parts will focus on health care and retirement savings. Through his research and discussion with other thought leaders, he mentions several factors that are going to drive up inflation and compensation. These include:

  1. Increased federal unemployment payments have reduced the labor supply;

  2. Disruptions within supply chains have placed inflationary pressures on prices and wages;

  3. Consumer Price Index (CPI) in May rose 5 percent from 12 months earlier which is the largest yearly gain since August 2008;

  4. Federal Reserve Bank of St. Louis indicated that the economy is seeing more inflation than they expected which they believe could lead to an interest rate increase late next year.

Though it is still early for all the big compensation consulting companies to provide their 2022 wage and salary growth figures, Stephen mentions Trading Economics, which is an online platform providing historical data and economic forecasts, is forecasting a 3.6% increase for 2022 and a 4.0% in 2023. He also mentioned that Kiplinger is forecasting that the Social Security cost of living adjustment (COLA) for retirees will be around 4.5% next year.

Stephen completes the article by mentioning what some other compensation experts believe employers will need to focus on as inflation returns after being a non-factor for several years. These include:

  1. Increase hourly rates by $1 to $2 every three to six months as a retention tool;

  2. Retention and sign-on bonuses for professional and management-level positions;

  3. Revisit total rewards strategies for the post baby boomer generations.

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We are beginning to receive calls from current clients that have not utilized hiring incentives to attract new employees. For several years, our health care clients have offered sign-on bonuses for nurses and other technical positions where competition for talent has been and still is fierce. We are seeing new business sectors enter the realm of hiring incentives, inclusive of manufacturing, fast food, retail, assisted living facilities, non-profits and professional trade organizations like HVAC companies.

You can look at your local McDonalds’ restaurant marque and see the following recruitment enticement, “Up to $500 sign-on bonus and up to $15.00 per hour”. Some McDonalds will pay you $50 to interview with them. If you have management skills and experience, the sign-on bonus increases up to $3,000.

Some of our municipal clients are offering or considering sign-on bonuses to increase the number of police officer applicants. We had a discussion with a potential rural production company client about having to compete for trade labor applicants because a local HVAC business was offering a $2,000 sign-on bonus plus trade school tuition reimbursement.

It looks like the current sign-on bonus norm for health care nurse is now becoming a new offering for other business sector organizations. Will hiring incentives continue after post COVID – 19 stimulus unemployment pay incentives dry up or will they be short-lived once supply and demand for talent levels off and the unemployment rate returns to pre-COVID levels?

I’m hearing $200, now $300, and now $500! Going, Going and Gone for $500!!! You’re Hired!


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Severance Compensation/Benefits

We recently came across a great article written for Stephens Insurance, LLC clients by United Benefits Advisors, LLC. In the article, it mentioned that the global economy has suffered due to the COVID-19 pandemic and many businesses are struggling with declines in business. With the decline, the article goes on to say that businesses have had to be creative with furloughs, pay cuts or freezes on matching retirement contributions. Though these temporary changes may tide the company over, they mentioned that several companies have reduced their headcount which has pushed the decision as to whether parting employees should receive severance pay or not. It is important to note that they encouraged businesses to consider relevant laws, company policies and employee messaging as it relates to severance.

Their definition of Severance is defined as a benefits package given to departing employees after they leave an organization. Their benefits package included items like a lump sum payment or pay continuation for a designated period, paid COBRA (healthcare benefits) coverage, and/or an outplacement program.

We agree with the article stating that many companies have a severance policy in place that addresses the terms, conditions, and formulas used to determine the package. We also agree that the standard practice of two weeks of pay for every year employed is common. The article didn’t mention a cap, but we tend to see a cap of six months (26 weeks), unless the position(s) are further up the organizational ladder.

The article ends by stating that eliminating staff is a tough decision and the impact is felt with former employees as well as the remaining employees and the business being impacted also. The last sentence in the article is full of wisdom, “Kind and fair treatment go a long way in maintaining employee confidence.”

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Employer Costs for Employee Compensation

What is your organization’s minimum wage figure?

With the new Biden Administration, there is a renewed effort to increase the Federal minimum wage from $7.25 per hour to $15.00 per hour for all non-exempt hourly employees. Depending on what state your organization operates in, the state minimum may be lower or higher than the Federal minimum. In Georgia and Wyoming, employers can pay their employees $5.15 per hour unless the employers are subject to the Fair Labor Standards Act, then the employers must pay $7.25 per hour. There are currently 19 states using the Federal minimum of $7.25 as their state minimum wage per hour. That leaves 29 states (58%) that are paying their employees a minimum wage above the Federal minimum. Fifteen states are paying $11.00 per hour or higher and fourteen states are paying between $8.00 and $10.50 per hour. Washington, D.C. is paying $15.00 per hour as the highest non-state district followed by the State of Washington at $13.69 per hour. However, CA has a law for businesses with 26 or more employees where they must pay their employees starting at $14.00 per hour.

Many companies are moving towards the proposed $15 per hour figure to attract, grow and retain their employee base. However, they are seeking to accomplish these higher wage figure minimums over a period of years vs. over night. Many states have also passed phased in multi-year adjustments over a three to five year period of time. We agree with these approaches as they are good for business and the economy and hope our country and the other states can also head in this direction.

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Resurgence of Job Valuing with Renewed Emphasis on Pay Equity and Comparable Worth by Biden Administration

Jenny Yang was appointed as the new Director for the Office of Federal Contract Compliance Programs on January 20, 2021 by President Biden’s administration. Since this appointment does not require Senate confirmation, it went into effect immediately. This move will require federal contractors to increase pay equity awareness and enforcement based on Director Yang’s Equal Employment Opportunity Commission (EEOC) experience with the Obama administration from 2013 to 2018.

During her EEOC tenure, Ms. Yang was a strong proponent for pay equity and closing the gender wage gap, as she directed the Obama administration’s effort to collect pay data from federal contractors and other employers through Component 2 of the EEO-1 form. Although the Trump-era OFCCP passed on its intention to review Component 2 data, the Biden OFCCP under Director Yang can be expected to analyze this data in search of potential gender-based, or other, pay disparities. 

Job valuing processes based on proven compensable factors will rebound to validate job comparable worth. Pay and job worth inequities for gender, race and other protected groups recognized by the federal government will be revealed by EEO-1 Component 2 data submitted to the EEOC.

Employers need to conduct on-going job valuing assessments and employee pay analysis studies in preparation for forthcoming Biden administration OFCCP and EEOC pay equity compliance audits and lawsuits.

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Closing Out 2020 and On To 2021

If you are reading this, 2020 is over and we are into the first week of 2021. As we reflect on 2020, we believe that most everybody is glad the year is over and ready to see how 2021 shapes up. Though 2020 has been a crazy year, we have appreciated the opportunity to assist our existing clients and new clients during the past 12 months with meeting various HR/Compensation needs.

Our oldest company, Johanson Consulting, Inc. was established in 1973 by our dad, Dr. Richard C. Johanson, who was a twenty year corporate HR Vice President and a twenty year Management Professor in the Sam M. Walton College of Business, University of Arkansas before he retired in 1989. Blair and I joined the company in 1999 and 1986 respectively. We are blessed with clients dating back to 1985 that we are still serving today as well as clients from our other company, DB Squared, LLC (licensed online HR software) which was established in 2005.

Blair and I, Denise Wagner and Chris Devine are looking forward to 2021 and want to thank our current clients for putting their trust in us since 1973. We are also excited to add new clients this year so check off one of your To Do list items by contacting us with your HR/Compensation needs.

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Projected Employee Salary Increases for 2021

Based on annual pay increase studies released by WorldatWork, Willis Towers Watson and earlier this year, the average salary increase budgets will range between 2.8% and 3.0%. Stephen Miller, CEBS published and released a SHRM article on September 3, 2020 titled, “Salary Increase Budgets Decline for First Time in 12 Years.”

The Willis Towers Watson survey indicated that approximately three quarters of the companies plan to distribute performance bonuses in 2021.  This survey projects bonuses to average 11% of salary for exempt employees and 6.8% to 5.6% for non-exempt employees.

We saw a softening of employee pay adjustments (COLA, General, and Merit) during this year due to the pandemic for our client organizations and businesses. We believe that our public (non-profit) clients will budget between 2% and 3% for 2021 pay increases and our private for-profit clients are planning for closer to 3%.

We have been pleased to see the resiliency of our clients during this very challenging year and we look forward to helping them navigate compensation planning in 2021 and beyond.

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Exercising the Salary Ranges

Blair and I have noticed that some of our clients are not adjusting their salary ranges and this is creating some internal problems which could be avoided.  When organizations don’t adjust their salary ranges or salary steps, then department managers start getting creative with modifying job descriptions and job values with the desire to obtain an increase in base salaries for their department positions.  Once this starts to happen, then everyone gets on the bandwagon to do the same thing.  By adjusting your salary ranges every one to two years, you keep your salary ranges or salary steps close to market as well as you avoid the need to mess with changing job descriptions and job values for the sake of increasing base salaries.  Let’s keep the salary ranges near market whether you have the budget or not to adjust employees’ base salaries. 

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When Job Matching Becomes a Burden

Recently, we had a discussion with a potential client via a GoToMeeting online session. We were visiting with three members of the human resources team about internal job valuing and job matching with a national external salary aggregator’s software system and market pay comparisons database.  One of the human resources team members mentioned how internal job matching had become a burden with the national external salary aggregator’s market pay comparisons database system.  For this human resources profession, it had become unmanageable to match unique jobs with the external market pay comparisons database system.  Even though the external national market pay comparisons database had thousands of job title benchmarks, the human resources manager was spending too much time on matching her company jobs with the national database jobs.

It is our recommendation that human resources and compensation professionals utilize an objective and defensible internal job valuing, matching, slotting or ranking process/system prior to the use of a national external salary aggregator’s software system and market pay comparisons database.  The internal job review and placement process/system provides the basis for job equity and pay structure placement analysis that can be validated with external market pay comparisons.   We believe that the combination of an internal job analysis and an external job matching process/system offers two forms of review analysis and promotes a more accurate and fair job assessment and position pay placement for organizations that offer transparent, equitable and competitive compensation pay plans.

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