Workforce Surveys

“Why doesn’t my company consider inflation when determining my pay increase?”

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What this employee is asking is, shouldn’t my annual increase percentage at least match the cost of living? And as management is forever touting the company’s ”pay-for-performance” philosophy, shouldn’t my increase be higher than that, given that I’m a good performer?

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Have you ever been in a situation where an employee complains to you that their pay increase is no better than the inflation rate? Or worse, that it’s lower? As a further aggravation they might ask you how the company can say there’s a pay-for-performance policy when all they do is grant increases that no more than match the inflation rate? It’s like treading water or running in place. It doesn’t seem fair or like a reward for good performance. Shouldn’t everybody receive at least an increase equal to the inflation rate? Shouldn’t increases reflect more than just a cost of living increase for the higher performers?

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The truth of the matter is that it’s common practice for companies to only give a side look at inflation (cost of living) when determining their annual increase budget. They do make note of it as a reference point and to compare against a final decision, but what they’re actually focused on are two prime considerations: 1) competitive market survey data that tells them what everyone else is paying for like jobs in their area; and 2) the expense (annual grant and fixed costs) to maintain the desired competitiveness.

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Companies routinely promise to pay competitive rates and, as such, will analyze what they consider the marketplace to learn what other companies are paying for jobs (base salaries) and what they are granting for increases. Their so-called “promise” does not include the granting of inflation-proof increases, or even an implied obligation to reflect the cost of living in their analysis. Their intent is to pay employees a competitive wage – including increases – and by “competitive” they mean what others are doing, not necessarily what is happening out there in the world of inflation.

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If affordability is an issue for any given year, it’s likely that maintaining competitiveness will have to suffer. A quick review of salary actions over the past three years will confirm that.

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Fairness is in the Eye of the Beholder

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Is that a fair way to manage compensation? Well, let’s imagine your name is on the company door. How would you spend your money? It’s likely you would seek to pay the lowest amount possible while still attracting, motivating and retaining qualified talent for your business. That strategy doesn’t imply decreasing pay levels but, as the owner, you would want to allocate your substantial payroll expense as effectively and efficiently as possible to staff your business with qualified and engaged employees. It wouldn’t make good business sense to spend more than you need to, be it for bricks and mortar real estate, raw materials or employee compensation.

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Consider the market for talent similar to a purchase at a retail store. How frequently would you pay more than the commonly accepted price if your extra money gained you no added value? Chances are you would not often take that approach.

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Other Perspectives

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Now let’s consider this issue from the employee’s point of view. What factors weigh heavily on their minds when considering the potential for pay increases?

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Most employees expect management decisions on compensation to reflect either the inflation rate (cost of living), the average increase for their industry/geography (typically as pointed out by newspaper “factoids”), or – if the company had a good year – a share of the financial success. You can be sure, though, that the figure employees have in mind is the highest of these three possibilities. And lest you forget, that figure is only for the average performer; better employees should receive more.

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Now this view is not necessarily wrong, from their perspective, and one can certainly not blame employees for a viewpoint that puts their interests first. However, companies typically maintain a “this is a business first” strategy, one that seeks to minimize controllable expenses without losing sight of their competitive pay target. The goal of paying competitive wages is not likely to be overturned by changes to the cost of living, newspaper snippets or a “feel good” moment following company success.

Another factor to consider is that employees are comfortable with changing their reasoning from year to year, while companies are stuck on the same track. So when inflation goes up or down, the company has a good or not so good year, or the media is touting industry averages, employee expectations may likely swing from one argument to another, rationalizing a consistently more aggressive pay increase strategy.

Now for a little tongue-in-cheek: turnabout is not considered fair play. Employees would not be pleased if the size of their increase were to fall with their chosen economic indicator. It should only rise. They would similarly object to smaller increases if the company hit a rough patch or if inflation nosed downward. It should be no surprise that employees would want their cake and to eat it too!

However, management strategies tend to be consistent over time, continually focusing on the marketplace and its affordability to maintain a posture of providing competitive pay and pay increase opportunities.

So how do you avoid a clash of employee expectations vs. management strategy? If companies would do a better job of communicating their pay philosophy they would be able to allay the employee guesses and assumptions that always accompany the grapevine rumor mill. Employees would know in advance what to expect. They might not like what they hear, but the employer/employee relationship would be improved by some straight talk about how pay increases are determined.

Chuck Csizmar is the Founder & Principal of CMC Compensation Group,an independent global compensation consulting firm whose expertise lies in helping companies manage the effective and efficient utilization of financial rewards for their employees. He also maintains a popular blog on compensation at his website

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