How to Create a Compensation Strategy to Fight Wage Inflation
In the face of an unstable economy, employers are challenged to recast their total rewards approach to create a competitive, fair and equitable compensation plan that fights wage inflation and competes successfully in today's market.
Any scan of a business publication in mid-to-late 2022 yields eye-popping forecasts for 2023 compensation strategies. The forecasts often dovetail with such headlines as "a tight jobs market boosts wage inflation" and "wages now the hottest inflation signal."
Not only do many employers face ongoing competition for talent in a candidate's market, but inflation also now complicates workforce goals. Employers find themselves struggling to attract and retain talent at every level in a financially sustainable and compliant manner. In their new white paper, Five Strategies to Fight Wage Inflation, Gallagher National Managing Director Kevin Talbot and Gallagher Senior Consultant Charles Sterling, Ph.D. — both of whom specialize in compensation consulting — offer a practical set of insights to address this widespread issue.
As experienced consultants, the authors advise employers to avoid a one-size-fits-all plan and to instead take a strategic and holistic approach to employee compensation. Their new white paper explores the current compensation landscape and offers guidance to help employers recast their total rewards approach. The goal: To create a competitive, fair and equitable compensation plan that competes successfully in today's market.
Foundational to that plan is clear understanding of where the organization is now in terms of business evolution and where it wants to go. Whether the organization is a startup, a growing enterprise or a mature business will drive the approach to fighting wage inflation.
No matter the stage of an organization's business evolution, most employers face economic uncertainties associated with inflation, fear of recession and record low unemployment. Meanwhile, the fierce competition for talent goes unabated.
When creating a competitive yet fair and holistic plan, Gallagher recommends organizations include employees' opinions, if feasible, to inform a strategy that will equip your organization to compete better for talent. Perhaps most importantly, the Gallagher team recommends leaders build and agree on a compensation philosophy to guide wage decisions now and in the future.
Creating fair and equitable compensation plans is challenging; on top of that, economic and market conditions make it tougher right now, given the continuing competition for talent.
Articulate a compensation philosophy
At Gallagher, we propose that employers build a well-articulated compensation philosophy to help guide hiring decisions. A philosophy differs from a plan, because a plan can be short- or long-term, but a philosophy encompasses how an organization sees its leadership, employees and place in the market.
A compensation philosophy is grounded in the organization's principles and values, and creates a blueprint for the compensation framework right now. Further, the philosophy allows for elasticity during economic conditions that shift from an employees' to an employers' market. Any compensation philosophy should connect directly to the organization's mission statement and should not create a disconnect from the overall corporate vision.
Gallagher consultants also advise against using a compensation philosophy as a knee-jerk reaction to changing economic winds and wage inflation; but rather develop a compensation philosophy that serves to guide myriad long-term compensation decisions.
If leaders in an organization or company find it hard to describe their compensation philosophy thoroughly, or if "that's the way we've always done it" drives the approach to employee pay, it's time to bring broader organizational leaders together to formulate a strategic compensation philosophy.
Organizations should consider investing the time and outside assistance as needed to undertake this exercise. Further, leaders must be sure to include all the organization's stakeholders in the room to add contrasting scope and context to the final philosophy. For example, a CFO and a CHRO likely will bring different perspectives to the compensation philosophy conversation.
Communicate the compensation philosophy
Organizations, no matter their industry, also must communicate the finished compensation philosophy developed through stakeholder discussions.
Communication is key. An organization's pay model must be on point — and leaders must be strategic about how they communicate the information throughout the organization. Communicating your compensation philosophy to existing and prospective employees can help them understand your overall employee value proposition and approach to total rewards.
Communicate a compensation philosophy clearly, including any changes and added value. Employees, including leaders, may not understand their compensation package, or they may focus only on the most obvious — the dollar amount on their paycheck. An organization's HR and communications teams must effectively communicate the value of the organization's total rewards compensation package.
Create a retention compensation strategy
A clearly formulated compensation philosophy not only should address recruitment strategies but also address a retention compensation strategy.
In addition to recruitment and onboarding costs, turnover means lost productivity. The Society for Human Resource Management (SHRM) reported in 2017 that the average cost to replace employees is six to nine months of their salaries. Depending on the employee's position level or specialty, the cost can exceed the annual salary by more than two times.*
Current employees value many of the same things that attract new talent, such as equitable and competitive total compensation and benefits packages, job growth and flexibility, among other factors. A robust retention strategy minimizes the need to compete in the open market for new employees and should be integral to the thinking behind a compensation philosophy.
To attract the best people and retain them, employers must be willing to invest in a strategic approach. A compensation strategy based on the right data and approach is critical to competing for talent during a time of economic uncertainty.
Download Gallagher's new white paper to discover a five-step strategy to help leaders rethink their total rewards to counter wage inflation. Explore proven strategies to boost your organization's competitiveness in this volatile market.
For further insights into your specific situation, contact Gallagher to start a conversation and help your organization to face the future with confidence.
*"Essential Elements of Employee Retention" Lynchburg Regional SHRM, 29 Oct 2017.