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How to Navigate Compensation with Salary Inflation

In December 2021, the Consumer Price Index for December was 7.0%. Inflation isn’t just impacting the cost of cars and groceries. The economic climate is influencing employers and employees, leaving many wondering how much salaries should be raised to adjust for inflation. One thing is for certain: there’s no easy answer.  

With the standard raise at 3% plus the fastest pace of overall increase in prices in nearly four decades, many employees will be spending the year thinking about how to negotiate their salaries, and employers how to deal with these conversations. 

We’re talking to hiring teams and candidates facing the real impacts of inflation on the job market. Our advice to both parties is the same, think long-term. This is an inflection point for many individual careers and organization compensation structures. Let’s look at both groups.  


For employees who want a raise 

Don’t lead with inflationInflation is not a strong enough narrative for a raise; however, it can be a proof point. The conversation should lead with why an employee is an asset to the organization and illustrate the impact that they have made with quantifiable data.  

Think before you ask: Employers will want to see that an employee can do the job a level above before considering offering a raise, regardless of inflation. For employees, this means they must start doing the work of the position above, before they ask for a raise to prove that they’re ready. Otherwise, employers are rolling the dice on employees as employers prefer safe bets over risks. If an employer is uncertain an employee can handle a broader remit, that employee only has one small notch above a prospective hire – they have acclimated to the culture.  

A new workplace means new costs: Many employees have slowly emigrated away from the traditional pilgrimage to the office and have begun to settle in a work from home lifestyle. This means that many employees are spending less on commutes and other expenses only applicable to office life. Employees should consider both new costs and costs that no longer apply when approaching an employer to discuss a raise based on inflation. 


For employers who will be deciding on compensation 

Reactively increasing salaries comes with risk: Employees who jumped for higher paying jobs could be considered overpaid when the market settles down. When this happens, employers will be expected to reshuffle their workforces once again to replace the overpaid employees with new hires who are just as qualified AND more affordable.  

Consider the new workplace: The pandemic has adjusted the notion of the modern workplace, with many employers instituting new work from home policies. This means that employees are saving on commuting costs and eating out not having to go into the office every day. This should be factored in when an employee and employer approach a raise discussion solely based on an inflation request. 

Know the roles that will cost 2-3X to replace: The cost of a job vacancy is calculated by determining the revenue lost by the vacant position, figuring out the payroll and benefit savings, and then subtracting the two. Use this calculator to figure out the real costs to your organization. Employers should prepare to pay 20% more on top of that in this employee-driven market. This comes out to a costly lost for any organization. For organization’s that had a highly profitable year, it might be best to offer somewhere closer to a 6% raise, especially to the employees who carried the company through the challenging times and remain loyal. This is even more true for companies that were highly profitable and did not provide raises at all in the past year. 


Find common ground 

No matter the economic climate, compensation is a tricky conversation. If you’re about to make or accept a job offer, research what others in a similar position are being paid. Outside sources will better set expectations on both sides of the table.  

Need help with salary strategy and negotiations? Our advisory services team can provide you with a compensation framework. Let’s talk.