How does inflation affect salary increases? Posted on July 25, 2023 (October 24, 2023) by Laura Morgan For employers, concerns about inflation and its impact on employees continue to grow. Some organizations have followed through on their initial, knee-jerk reaction to the current talent and retention challenges and boosted salaries in an effort to keep pace. However, this approach isn’t without its problems—I had one client who gave a 7% increase across the board and is now struggling to make it work. Other organizations that do the same—without first thinking their plan through—are likely to find themselves in a similar predicament. Should inflation dictate salary increases? Yes, employees likely do need an increase, but inflation should only be one factor in determining the amount. How much salaries should increase with inflation is a question each employer must consider individually. If you’re struggling to determine salary increases based on inflationary pressures, you’re in the right place. Below are three questions you can use to guide your decisions. If you can’t answer “yes!” to all of the below, then salary increases are likely not the best option for your organization at this time. Take the burden off your team, and get expert guidance with your compensation planning cycles. Get a free demo of SimplyMerit software to see how it can help you manage compensation planning more efficiently and effectively. Should you give salary Increases for inflation? Unless you can say “yes” to these questions, the answer is no. Do salaries always increase with inflation? No. Despite skyrocketing inflation, your organization shouldn’t give salary increases on the basis of inflation alone. Make sure you can answer “yes” to the following questions before you move forward with pay raises: 1. Is your business financially able to support wage increases? Just because you can give a salary increase now doesn’t mean you should. Leaders should be thinking 18 months out in their compensation planning, considering whether or not their business is viable for the long run, before they hand out increases. When I ask the CFO if the company’s goals are attainable, I need the answer to be stated in a probability of success. With that answer, we understand the long-term incentives, we have a better understanding of the short-term plan’s anticipated achievement for annual bonuses, and then we know if the company’s growth can support a salary or payline increase, financially. The CFO knows but it helps explain to the HR leaders about why budgets are what they are. When HR leaders from larger companies join smaller firms, it usually surprises them that the volatility of a business is directly impacted by the volatility lately due to inflation. If you have the funds available to award salary increases, that means your business has been experiencing a good year. Therefore, your employees will expect to have a reward for their respective services to keep up with the market. If the year was tough financially, it is OK to share that message with your employees and then share how that will impact your payline. Employees will understand if you are transparent and if they feel that they are part of the journey. If companies share their situation and ask for help, engaged employees typically feel inspired to fix the issue. If they succeed, fix their pay. If not, well, you have bigger issues to deal with. 2. Have you done research on compensation before increasing salaries? Before making any salary increases, know exactly what is considered competitive for each job role for which you’re considering an increase. I’ve had some clients who weren’t aware that their employees are already highly compensated; as a result, their planned salary increases were unrealistic for most roles. Make sure you’re spending your money wisely. (Our software, SimplyMerit, can help with this task!) 3. Are your organization’s salary increases aligned with work/pay scales? It is important to have a well-defined job structure in order to ensure each employee receives the appropriate level of pay for the work they do. This helps avoid any confusion or ambiguity around who should be getting what amount of pay, and it can also help streamline the process of making changes to the pay structure when needed. Handing out salary increases feels better when they are sustainable, thoughtfully planned, and well-deserved. Not sure if you should consider salary increases to keep up with inflation? Let us help you figure it out. If you’re giving increases only because of inflation—without a philosophy or strategy behind them—or if you can’t remember the last time your HR team evaluated the organization’s compensation structure and salary increases, take a step back and do some planning first. Attempting to untangle salary range data without a guide can be challenging, so let us help. At MorganHR, compensation consulting is our specialty. Our team of consulting experts helps organizations like yours plan for today and tomorrow, educating executives on how to make smart decisions about pay. Additionally, with our compensation software, SimplyMerit, you can streamline your pay structure and make sure that your employees are paid fairly for the work they do. Contact MorganHR today to learn more about SimplyMerit and how it can benefit your company. About the Author: Laura Morgan As a founder and owner of MorganHR, Inc., Laura Morgan has been helping organizations to identify and solve their business problems through the use of innovative HR programs and technology for more than 30 years. Known as a hands-on, people-first HR leader, Laura specializes in the design and implementation of compensation programs as well as programs that support excellence in the areas of performance management, equity, wellness, and more.