Use economic challenges as catalysts to develop a sustainable total rewards program that doesn’t hinge on increasing salaries.

Authors: Mike Pesch William Ziebell


Global developments continue to compound supply chain vulnerabilities. But better insight into the risks associated with related economic pressures and inflation will help organizations approach total rewards more sustainably.

Supply chain fragility has yet to show any signs of easing up. The persistence of COVID-19, the ongoing war in Ukraine, rising energy costs and unrelenting consumer demand are conspiring to push up prices. During the 12 months ending in March 2022, they surged 6.6%, contributing to inflation that was more than three times the Federal Reserve's target rate.1

On the labor market front, wage inflation due to low unemployment now compels employers to pay more for talent, adding to the existing strain on compensation budgets from competitive pressures. In response to this interplay of variables, 64% of employers have adjusted their budgets upward. This change accommodates merit (69%), cost-of-living (39%), general (30%) and step (13%) increases. Just 29% haven't planned any budget alterations.2

Taking a measured response to volatile change

Colliding price and wage inflation don't necessarily directly correlate. Consumer prices increased by 8.5%3 in March from the prior year, while wages grew by only 5.6%,4 eroding some of the compensation gain for many employees.

The Federal Reserve raised its benchmark interest rate by half of a percentage point in early May 2022, and some economists expect this hike — the biggest in 20 years — is only the first.5 These measures could possibly slow the economy or even lead to a recession, and perhaps jeopardize the ability of organizations to sustain the revenue that's required to cover higher compensation expenses.

At times like these, it's important to remember that inflation can be temporary, but wages are sticky. Inflationary pay increases are difficult to rescind, and corresponding cost considerations apply. From an insurance standpoint, compensation growth directly affects workers' compensation premiums because they're based on payroll. The risk to the employer is an increase in pass-through costs.

A grounded approach offered by traditional solutions

Market changes now happen so often that online salary planning reports quickly become outdated. Without current data, employers lose the ability to proactively and objectively address pay increases, and instead may resort to making decisions instinctively. External advisors can identify where money is spent and offer guidance on variable pay, long-term incentives, bonus plans and the equitability of compensation approaches.

Matching salary increases to inflation may not be necessary if organizational assets like work culture, connections with other people or professional development opportunities are highly important to employees. Efforts to package and communicate total rewards effectively can also add value. Ongoing interactions with employees — what employers say and how they connect with their workforce — strongly influence relatability and a sense of belonging.

Proactively minimizing and managing the effects of workers' compensation claims

Getting compensation right is critical for talent retention under any circumstances. Most employers (72%) increased their open positions from January through June 2022, while they decreased for just 8%, and the number didn't change for 20%.2 Worker shortages have far-reaching implications that include a higher risk of workplace injury, especially in the first year of employment. Within the manufacturing industry and warehousing sector, 42% of workers' compensation claims were filed by first-year employees in 2021, compared to 31% a decade earlier.6

First half 2022, 72% employers increased job openings, 8% decreased, 20% had no change

A shortfall or an influx of employees calls for strengthening workforce vigilance through proper risk- management orientation on safety practices and procedures. Emergency response plans are an important topic. In 2020, the pandemic and other serious safety and health hazards put an enormous strain on healthcare workers, contributing to a 249% rise in workplace injury and illness rates.7

Workers' compensation injuries have a ripple effect beyond the incapacitated employee, all the way up to the operational output of goods and services. Loss isn't restricted to claims when the employer must backfill jobs in a tough hiring environment while minimizing the impact on productivity.

Preparing for lagging healthcare costs that may be higher

While healthcare delivery system shortages raise costs in real time for nurses and supplies, actual price increases typically lag. Some of that difference in pricing will eventually be passed on to employers and consumers when providers request higher reimbursement.

Healthcare services, prices, reimbursement rates and labor contracts are set several years in advance. So even if inflation rates normalize in subsequent years, waves of higher pass-through costs may still roll through. Assuming that healthcare inflation catches up to inflation for overall services this year, the 2022 profit pools for the overall healthcare industry could drop by about 12% to 24%.8

Helping employees make informed saving and spending decisions

During inflationary periods when a dollar doesn't stretch as far, employees may save less for higher education and retirement. Problematically, this lost opportunity can undermine the ability to achieve financial wellbeing goals. Lower discretionary income may also prompt employees to reduce the amount of their employee-paid voluntary benefit elections.

Sometimes personal situations leave little choice. But it's important to help employees avoid compromising the value of their accident, life and critical-illness protections, which are offered to fill gaps in coverages and safeguard employee finances.

Weighing cost and flexibility when considering return-to-workplace policies

Many remote employees are returning to the office at a time when rising prices for gas, public transportation and food make this switch more expensive. Market uncertainties have also increased insurance rates for premiums across several lines, including property and liability.

Planning for the reduction of their corporate real estate footprint has already occurred for many organizations or is underway. And determining the optimal amount of space is a key question as they seek more fluid workspaces.

Rather than mandating a return, some employers are leveraging hybrid work as a cost-containment measure that enables and encourages flexible, purpose-driven office collaboration. Ensuring that agile and remote workforces share the same sense of organizational culture and receive equitable treatment is essential attraction and retention, and often requires a committed investment.

Ensuring that agile and remote workforces share the same sense of organizational culture and receive equitable treatment is essential to attraction and retention, and often requires a committed investment.

Unpredictability has become predictable. Since entering this decade, significant and unforeseen events have occurred at seemingly regular intervals, disrupting economies, businesses and the world at large. But as the calendar continues to turn the pages on the future, people and organizations still show remarkable resiliency. New outlooks shaped by recent experience are already inspiring ideas that will move the world forward in a better direction.

Advances are built on a foundation of proven methods and solutions. For total rewards, a strategic, data-driven approach allows a more holistic view into how well they perform, and external data provides added support for successful spending decisions. Apart from focusing on compensation, exploring and responding to the reasons why their employees choose to work for them helps guide and sustain organizations — through and beyond tough times.

Learn about the latest trends in compensation, benefits, healthcare consumerism and more, to help you run a thriving organization in a volatile economic climate. Download the Q3 issue of Gallagher Better WorksSM Insights.

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Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as "Gallagher Benefit Services of California Insurance Services" and in Massachusetts as "Gallagher Benefit Insurance Services." Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.