Current Economic Climate and Impact on 2022
2021 has been a year of surprises in administering employee compensation programs. Among the changes and challenges in 2021 are the following:
These factors have led many to rethink past and current compensation strategies as we move into 2022. According to SHRM, when planning for 2022:
- Consider the future of the organization. The ongoing COVID-19 pandemic has caused employers to question operation practices: Where will employees work? How will they get their work done? What will the overall organization look like, and how many employees will it need in the future?
- Rethink established pay practices. This can be a good time to reconsider whether the traditional approach to paying employees is still viable. For example, employers that want to increase the organization’s resilience and flexibility could consider skill-based pay.
- Look beyond pay. As employees go back to work on-site, employers may find that the worker’s value of their employment relationship has changed. In some cases, employers may need to provide new types of benefits, especially programs that provide more flexibility and security, in order to retain talent.
- Expect continued uncertainty. When setting pay, employers should be prepared for a high level of uncertainty in the market.
According to McKinsey & Company:
- As organizations navigate amid the COVID-19 crisis, a key part of their strategy should be revising current total rewards to reflect changes in both financial and non-financial incentives.
- Non-financial rewards will become increasingly significant as organizations seek to retain talent with flexibility in a post-COVID workplace.
- Total rewards have taken on increasing importance given the cultural context and conversation around pay equity. The current disruption provides a unique opportunity for organizations to holistically rethink their total rewards philosophies.
With this in mind, predictions impacting salary adjustments for 2022 have been mostly conservative. The following is a summary of the leading predictions for 2022:
- WorldatWork: WorldatWork’s 2021-2022 Salary Budget Survey found that salary increase budgets are projected to grow to 3.3 percent on average in 2022, up from 3 percent in 2021. “This data signals continued economic recovery and an increasingly tight labor market,” the organization reported.
- The Conference Board: The 3 percent median increase for 2022 is expected to hold steady across employment categories (i.e., nonexempt hourly, nonexempt salaried, exempt, and executive), according to Judit Torok, a senior research analyst with the large-business membership and research association. “After being a nonissue in wage determination for several decades, strong inflation in 2021-2022 could lead to greater demand from workers and unions for a cost-of-living adjustment in 2022.”
- PayScale: PayScale, a compensation data and software firm, released its second quarter 2021 PayScale Index in July, showing that wages are rising 0.6 percent quarter-over-quarter and 2.6 percent year-over-year. Wages are rising particularly fast for occupations such as:
- Food services (up 4.1 percent)
- Transportation (up 4 percent)
- Retail (up 3.9 percent)
According to PayScale’s 2021-2022 Salary Budget Survey, conducted from May through July 2021 (with responses from 736 U.S. employers) businesses offered over 80 percent of their nonexempt and exempt non-management employees base salary increases of 3 percent on average in 2021; a jump from the average planned increase of 2.6 percent last year. Payscale found “going into 2022, businesses are planning to further expand salary increases to 3.3 percent on average”.
- Salary.com: Salary.com’s annual U.S. National Salary Budget Survey reveals that 41 percent of organizations plan on having a higher salary increase budget in 2022 than they did in 2021; representing the first significant shift in merit increases in the last 10 years of survey data. For perspective, last year just under 10 percent of organizations planned a higher salary budget increase than the prior year.
- For 2022, 12 percent of organizations intend to give 4-5 percent increases, versus just 7-8 percent of organizations in 2021. Of note, these 4-5 percent planned increases hold steady across all job categories, from hourly employees up to the executive level.
- “This is the first sign of a notable shift in salary budget increases in 10 years, particularly for hourly employees who have long experienced stagnant pay,” said Chris Fusco, Senior Vice President of Compensation at Salary.com. “Minimum wage legislation sweeping the country is a big factor. But the re-emergence of lower-level workers executing their market power is undeniable. Aging Baby Boomers and pandemic-related worker shortages have created this scenario where we have more jobs than we have people willing, or able, to work.”
Astron Solutions’ Insights
An important indicator to be attentive to in October will be the final approved adjustment to Social Security. From AARP:
Social Security beneficiaries could be in line for the biggest cost-of-living adjustment (COLA) since the 1980s due to the recent burst of inflation. “The COLA will no doubt be higher than it has been for the last decade, probably in the 5.5 to 6 percent neighborhood because of rising prices,” says David Certner, legislative counsel, and director of legislative policy for government affairs at AARP. Any estimates are preliminary, and the actual COLA will depend on changes in prices between July and the end of September. “With one third of the data needed to calculate the COLA already in, it increasingly appears that the COLA for 2022 will be the highest paid since 1983 when it was 7.4 percent,” says Mary Johnson, Social Security policy analyst for The Senior Citizens League. The Social Security Administration (SSA) typically announces the amount of the annual adjustment, if any, in October. The increase in benefits typically goes into effect in January.
This adjustment is often used by organized labor for requests in salary adjustments when contracts expire. If the Social Security adjustment is more than 5 percent, the adjustment will most likely become the requested 2022 pay adjustment. This will have a ripple effect on non-bargaining unit pay adjustments as well.
With the continued move on the unofficial minimum wage, along with no end in sight for the labor shortage, Astron Solutions recommends the following:
- Base pay adjustments should be budgeted between 3.0% (non-profit) and 3.5% (for profit), depending on your industry segment.
- An additional 2% – 2.5% should be set aside in the budget for unanticipated market adjustments throughout 2022, due to continued minimum wage increases and the inflationary impact of the labor shortage.
- Incorporate formal total rewards strategy discussions as you move into the 2022 budget season. The discussion should focus on total rewards offering alternatives beyond base pay. This critical topic will be discussed in the next issue of Astronology®.
We’d love to hear your thoughts on this first article in the series! Please share in the comments section below.