Over the last ten years, employers have had it rather easy. Inflation has remained between 1% and 2%, while wage raises have risen between 2% and 3% during the same period. However, for the first time in decades, “inflation is a significant influence in determining annual rises,” according to Gad Levanon, the Conference Board’s top economist.
According to the Mercer Compensation Planning Survey, pay budgets are predicted to rise by 3.2 percent in 2022, despite these concerns. When merit is added in, as well as other sorts of base pay increases like promotion pay increases, the estimate rises to 3.5 percent. Mercer’s estimate is somewhat higher than the 3 percent and 3.3 percent pay raise projections it made in August, despite the fact that inflation has continued to rise. And the increase over 2021 raises is modest – this year’s merit raises were 2.8 percent, with a 3% total increase in pay budgets.
In a tight, pressured labor market, employees are unionizing at a rate not seen in decades, and millions of people are quitting their positions – 4.2 million workers abandoned their jobs in October, down somewhat from the previous month but still leaving 11 million job opportunities. Employee expectations are at an all-time high, while quit rates have stayed at a 20-year high.
To keep up with inflation, how much need wages rise?
Work has gotten worse for many since the outbreak of the epidemic, further aggravating the issue. Due to the high incidence of employees abandoning their jobs, a smaller number of people are shouldering the workload that was formerly carried by a larger number of workers, adding to significant burnout rates. Not to mention the additional hazards posed by the pandemic itself, which include creating more hazardous work situations and adding more labor such as ensuring consumers are wearing masks.
“No one thinks when they sign up to be a cashier that that job will be deadly,” Molly Kinder, a Brookings fellow and the report’s author, told Recode, referring to the dangers that people working in front-line positions at places like grocery stores or pharmacies face if they become infected with the virus. According to Kinder, one Kroger employee she’s been interviewing isn’t sure if a raise will be enough to compensate for the increased stress.
“She’s been harping on the importance of a $15 minimum wage. “Is that additional tiny bit of money worth it when my mental health is suffering, it’s so unsafe, and I’m spending more at the pump?” she asks when she finally understands.
Inflationary pressures on salaries are projected to endure through 2022. According to a new poll of more than 5,000 employers across industries by compensation software business Payscale, 85 percent of employers are concerned that projected salary increases this year, which are already significantly greater than in recent years, will be undermined by inflation.
Fortunately for you, we’re in a once-in-a-generation historical moment where inflation is predicted to decline but labor shortages are not.
“According to David Smith, an economics professor at Pepperdine’s business school, “workers have more bargaining power, which can be a countervailing force to some of the difficulties we’re having,” such as income disparity. “In the long run, that would be beneficial.”
For the time being, those gains are required to keep up with the rising cost of commodities. However, if the price of products moderates, these long-overdue pay increases may have some real-world impact for Americans.
What employers are going to have to do about it
Employers suffer from inflation because they must spend more to keep their employees from looking for greater pay elsewhere. Employers may need to raise wages in line with inflation, provide better perks, or change how they operate in order to retain those workers.
The most basic solution is to raise salaries. In the six years that Payscale has been collecting this data, 44 percent of firms say they plan to provide average raises of 3% or more this year. Fewer than 10% are increasing pay by more than 5%, which is more in line with inflation.
“There are certain companies who simply go out there and say, ‘We have enough wealth, and we can go out and be dominant in salary as a differentiator,'” says one employer. Payscale’s chief people officer, Shelly Holt, stated. “When you look at a middle or smaller company, they might not have the luxury.”
To recruit and keep employees, these businesses will have to rely more heavily on other forms of benefits. This might entail, among other things, greater health care coverage, increased vacation time, and remote job choices. That corresponds to some of the insights gained during the Great Resignation.
“Employees want more than just a good salary. Pay is important, but employees also desire workplace flexibility and the opportunity to live better lives, which is changing how they think about perks and total rewards, according to Holt.
Companies are offering a greater choice of perks this year than they were pre-pandemic, according to Payscale. Prior to the pandemic, only 40% of the organizations polled offered remote work choices; now, 65% do. This year, the number of companies offering mental health and wellness programs increased by 7% to 65 percent. There were also modest increases in the number of businesses that provide four-day workweeks and child care subsidies.
According to Allie Kelly, chief marketing officer of recruiting platform Jobvite, the things that might help set firms apart require a shift in perspective, from treating employees like labor to treating them like people. This necessitates a constant reevaluation of offers in order to keep up with what’s vital to their employees.
“People have various perceptions and understandings of their own self-worth and what matters to them in life. Money is important, but it isn’t enough,” Kelly said, listing perks such as child care, shorter workdays, and more professional growth, as well as lower benefits and income.
While many of these perks may be less expensive than a 7.9% annual raise, they are not free. Companies must decide whether they can or should pass on those expenses to customers, which could worsen inflation, or whether they can simply swallow them as a cost of doing business. According to Erica Groshen, senior economics advisor at Cornell University’s labor school, this could entail opening for fewer hours, producing less overall, or cutting profit margins.
“Right now, and for a long time, we have historically high profit margins,” Groshen remarked. “As a result, it would not be considered a crisis in the past.”
The rising expense of human work is also hastening the transition from wage labor to automation, as has been predicted for some time. Robots, while expensive, do not demand more money and do not become ill during a pandemic.
Employers will replace people with robots to the extent that they can, according to Shivaram Rajgopal, a professor at Columbia University’s business school.
“Now you use a QR code to find the menu,” Rajgopal explained. “The next step is to simply place the order, and it will be delivered to the kitchen. We don’t require as many people to serve us.”
However, for those of us who haven’t yet been replaced by robots, the current employment scenario may work in our favor. That’s because, while inflation is expected to reduce, the demographics that are causing the labor shortage an entire generation of baby boomers retiring aren’t likely to change.
“I don’t think the power will suddenly shift back to employers,” said Kinder of the Brookings Institution. “If inflation moderates, some of these demand-and-supply difficulties moderate, and workers retain some negotiating leverage, that would be a good conclusion.”
To put it another way, your next increase may feel a lot better if you’re not spending as much for everything else, but we don’t know when high inflation will end.
This item has been updated with new inflation and wage data from the Bureau of Labor Statistics as of March 10, 2022.
Is a 3% rise sufficient?
An annual pay raise of 3% may not seem like much, especially in light of recent events in the world. But it’s better than nothing in today’s environment. Remember that little increments add up over time and can culminate in a very high pay.
To keep up with inflation in 2022, how much of a raise do I need?
In 2022, 44% of companies intend to grant salary raises of more than 3%. Inflation was 7.5 percent higher in January 2022 than it was a year earlier, a 40-year high.
Is a 2% rise sufficient?
We normally conceive of pay hikes as a reward for outstanding performance or long-term devotion. There are, however, several different types of wage hikes.
Adjustments for Living Costs (COLA). Things get a little more expensive every year. Inflation is the term for this. We’ve all heard grandparents brag about how much they could get for a cent back in the day, and that’s exactly what we’re talking about. Real wages and nominal wages are two words that must be understood in this context.
Increase in the minimum wage. Using a dollar number, the amount of your pay has grown. Your nominal wage rise would be $5,000 if you were paid $50,000 last year and $55,000 this year.
Increase in real wages. Your pay has increased in terms of purchasing power rather than dollar worth. Inflation is factored into the real pay rise. So, in the above example, you may have received a 10% nominal wage rise, but with a 2% inflation rate, your real wage gain was only 8%.
Essentially, cost of living adjustments ensure that your purchasing power remains constant from year to year. If the inflation rate for 2019-20 was 2%, a 2% rise would equate to you earning the same amount of money this year as you did last year. It’s only a small increase, but it’s enough to keep your compensation in line with the cost of living.
Pay rise depending on performance. This is the most common type of raise; you perform better at work, and your company rewards you with a pay increase. Organizations have budgeted a 3.6 percent pay increase for high performers, 2.5 percent for middle performers, and 0.6 percent for low performers, according to the WorldatWork Salary Budget Survey 2019-2020, indicating a significant difference in merit-based pay increases depending on your performance level.
In addition, 76 percent of employers planned to award yearly performance bonuses (not salary increases) in 2020, averaging 11 percent of exempt employees’ total compensation and roughly 6% for non-exempt employees, according to the report.
Promotions. Everyone understands that one of the main reasons people strive for promotions is because they typically come with greater money. A promotion comes with new or more duties, whereas a performance-based pay rise incentivizes and rewards you for superior work at your present position. Promotional raises are budgeted separately by 54% of companies. The average promotional increase in 2019 was 9.3 percent.
Raising of capital. Employed to ensure that employees are paid equally for equal labor. Although we discussed equity increases in the context of women and minorities, they are also used in the following instances.
How to calculate salary increase: Flat raise
You decide how much more money you want to give the employee and add it to their annual compensation with a flat rise.
Divide the yearly salary by 52 (weekly), 26 (bimonthly), 24 (semimonthly), or 12 (monthly) to see how much the rise raises the employee’s weekly or biweekly gross compensation (monthly).
Example
Let’s imagine an employee earns $40,000 per year in gross wages. Their weekly gross pay is $769.23 ($40,000 / 52). You decide to give them a $2,000 raise as a one-time bonus. You’ll need to figure out how much their new weekly income will be and how much more they’ll get each week.
- Finally, take their former weekly pay and subtract them from their new weekly wages: $769.23 $807.69 = $38.46
The new annual salary for the employee is $42,000. Their new weekly compensation is $807.69, an increase of $38.46 above their previous pay.
You know the raise percentage you want to give
Calculate how much the raise will be and add that amount to the employee’s current earnings if you know what percentage you want to give. Multiply the raise percentage by the employee’s current salary, then add it to the employee’s annual gross salary. The formula is as follows:
Divide the employee’s annual wage by 52 (weekly), 26 (biweekly), 24 (semi-monthly), or 12 (monthly) to see how much their paycheck increases (monthly).
Let’s imagine you decide to provide a 4-percentage-point raise to an employee. The employee’s current salary is $50,000 per year and $1,923.08 per week ($50,000 / 26).
You’ll need to figure out how much of a raise they’ll get, their new annual wage, their new biweekly paycheck, and how much extra money they’ll get per payday.
- To begin, divide the percentage by the employee’s current yearly salary: $50,000 multiplied by.04 is $2,000
- Next, multiply the raise amount by the employee’s current annual salary: $50,000 plus $2,000 equals $52,000.
- Divide the new annual salary of the employee by 26: $52,000 divided by 26 is $2,000
- Subtract the prior biweekly payout amount from the new biweekly paycheck amount for the employee: $1,923.08 $2,000 = $76.92
The employee’s 4% raise is a $2000 increase in one lump sum. Their new yearly wage is $52,000. Their new biweekly compensation is $2,000, an increase of $76.92 over their previous biweekly pay.
Simply looking for the amount of the employee’s biweekly raise? Examine the employee’s prior biweekly paycheck and make the following observations:
- Multiply the employee’s prior biweekly paycheck by the % raise: $1,923.08 multiplied by.04 is $76.92 (biweekly raise amount)
- To the employee’s prior biweekly salary, add the biweekly raise amount: $2,000 = $76.92 + $1,923.08
You know the new salary you want the employee to receive
You can figure out how much you want the employee’s new compensation to be, but you need to know how much of an increase it will be in percentage terms.
Let’s continue with the previous example. A year’s salary for an employee is $50,000. You desire a new annual pay of $52,000 for them. You’ll use the formula above to calculate their rise %.
- To begin, figure out how much the employee’s old and new salaries differ: $2,000 is the difference between $52,000 and $50,000.
Is a wage rise of 4% beneficial?
What constitutes a reasonable raise is usually determined by the individual getting it. On average, companies offer employees a pay raise of 3-5 percent. Even if this range may not appear to be a fair rise, keep in mind that steady compensation increases over time can build up to a bigger salary than you received when you first started at the company.
While most employers will give you a monetary rise, they may also provide you a non-cash incentive or perk in lieu of or in addition to your monetary raise. This type of raise isn’t taken into account when calculating the percentage rise you may or may not have gotten. A non-monetary reward, such as a professional development program, can, on the other hand, help you optimize your earning potential in the future.
What does a 3% raise entail?
In general, you’ll want to raise their pay by a certain proportion. Depending on the year, the national average wage increase is usually between 3% and 3.5 percent. Top achievers are being rewarded with higher-than-average pay hikes, while regular workers are receiving lesser raises.
I’ve written about percentages before, in a piece about computing sales tax; today we’ll talk about percentages in relation to salary raises.
When your employee is ready for a raise, figure out what percentage is appropriate and then do the math:
Step 1: Convert the percentage into decimal form
This is quite straightforward, but you must convert the % to a real amount that can be multiplied by the employee’s current pay rate. Simply change the decimal two places to the left to accomplish this. You’ll need to utilize for a 3% rise. 03.
Step 2: Multiply the employee’s current pay rate by that decimal
If your employee earns $15 per hour, multiply 15 by.03 to get.45. As a result, your employee’s hourly wage will increase by 45 cents. For a $45,000-per-year employee, the answer is: 45,000x.03=1,350. As a result, your salaried employee will receive a wage raise of $1,350 per year.
Should I anticipate a raise each year?
If you’ve just begun a job, wait at least six months before asking for a raise. If you’ve been with the company for a year or more, your employer is more likely to grant you a raise. If you’ve worked for the company for a long time, you can ask once a year. If your boss wants to talk about your pay at a performance review, this “rule” may change. If this is the case, prepare your talking points ahead of time to give yourself the most leverage.
How do greater earnings contribute to inflation?
Wage Increases: What Causes Inflation? Inflation is caused by wage increases because the cost of producing products and services rises as corporations pay their workers more. To compensate for the cost increase, businesses must increase the price of their goods and services in order to retain the same level of profitability.