Soaring inflation may lead to employee retention problems

The accelerated pace of inflation got many executives and HR leaders increasingly worried about its impact on the businesses and employees alike. The erosion of purchasing power inevitably leads to higher wage demands, and if those aren’t met the companies will face unprecedented employee retention problems. We all are aware that the Great Resignation is not yet over.

Employee turnover continues to rise

Since July 2021 each month 4 million American employees quit their job. The numbers only rose to 4.4 for March 2022. And the companies are eager to hire those that are not happy in their current place. In fact, the new hires continue to consistently outpace the resignations by over 2 million each month. These all-time records indicate that soon most companies will face serious employee retention issues and labor shortages. Wait, that is already the case.

According to the 2022 Mercer survey, nearly half of US organizations cited labor shortage as a significant issue. And three in four of the respondents claimed that current employees quit their jobs due to pay dissatisfaction.

Stephanie Naznitsky, an executive director from Human Resources Consulting firm Robert Half confirms that data: “Right now, we’re in a candidate-driven market. There are more job openings than there are people to fill them. With the rise in the cost of living, employees know they can go out into the market to find other opportunities that would help better their situation and offset some of the personal living expenses that have increased in recent months.”

No wonder then that 99% of HR managers are either very or somewhat concerned that rising inflation is effectively eroding the employee compensation, granting that 56% of the employees who recently changed jobs voluntarily receive higher pay.

Currently salary competition is the most popular among employee retention strategies

If that’s the case, the easiest solution for a business facing retention problems is to simply jump on the bandwagon and offer higher salary spikes compared to the competition.

Moreover, it seems that is what many companies are in fact doing - 73% increased their merit budgets, 34% offered higher sign-on bonuses, and 23% used targeted promotions to make sure they are still attractive to current and potential employees alike. In general, this year companies are allocating much more towards the pay raises.

Companies increase budgets to retain employees

A survey by the Conference Board revealed an even bigger increase in store: it found that companies are setting aside an average of 3.9% of total payroll for wage increases next year, the most since 2008. Though those increases are higher than in previous years, smart employers will likely go further.

Namely, they fear losing workers to companies that can afford to pay higher wages, especially as employers struggle to hire and retain employees more than two years into the pandemic.

But won’t that ruin your budget?

Constant competition through salary increases driven by the fear of employee retention problems carries the serious risk of entering the pay spiral. Very few organizations are in a position to weather that, and for most, it simply won’t be financially possible. Additionally, the current raises may be eroded by the inflation in a matter of months anyway.

Employees expect the raise

It’s also a precedent to which many employees can get used to and simply start to expect inflation-adjusted compensation. But “you can't train employees to expect the raise just because inflation right now is 8.5%,” says David Turetsky, vice-president of Salary.com’s consulting division and a longtime compensation consultant at Aon: “You can’t expect that to be the target in their mind for what merit increases are going to be because any increase you give them that is not at least 8.5% will set up the expectation that they’re ‘losing money.'"

Worst of all is that 80% of executives and HR leaders bluntly state that the increases in compensation budgets are simply ineffective and have not lessened the pressure to keep employees.

Best employee retention strategies

There are other successful employee retention programs you can use instead.

In what follows I describe 5 steps to boost employee retention you can take to successfully attract and retain talent at your company. All of those actions basically represent a shift in the paradigm, from the competition based solely on compensation to a more holistic approach of high-quality employee experience. Most importantly, these options are effective alternatives to never-ending compensation budget increases.

5 Alternative Employee Retention Strategies to Salary Increases and Cash Bonuses

1. Positive Corporate Culture increases employee retention

Toxic culture is a 10 times greater contributor to high employee turnover than compensation . This surprising fact was found by the researchers from MIT Management Sloan School after analysis of more than 34 million US employee profiles, who left their job for any reason from April to September 2021.

This means that if the company’s culture is toxic, the workers are 10 times more likely to leave compared if they were unhappy with their pay.

Low employee retention rate costs US companies $50 billion a year

In fact, it’s by far the strongest predictor of employee attrition, and its negative impact on businesses had already been known way before the Great Resignation. But why does employee retention matter? A 2019 study showed that employee turnover due to the toxic culture costs companies about $50 billion per year in the US alone. And replacing one worker may amount to as much as twice his or her annual salary.

Toxic company culture results in employee dissatisfaction destroying your retention efforts

So what is toxic corporate culture? How do we distinguish between elements that are merely irritating and those that we would label as ‘toxic’?

The MIT researchers believe that the leading factors contributing to the company’s dysfunction include:

• disrespect
• lack of inclusion
• unethical behavior
• ruthless competition
• and abuse.

These elements become truly toxic the moment they are so annoying they become unbearable and affect the employee’s well-being and result in lost productivity.

Workplace plagued by cronyism and nepotism, dishonesty, and lack of courtesy, transparency, equity, diversity, and inclusion, where employees feel bullied and harassed, won’t stand a chance to attract new or keep their current workers.

This is evident in data, where 73% of US potential new hires choose a company whose corporate culture agrees with their personal values. And that information is widely available through platforms such as Glassdoor.

Employee satisfaction is a key to retention strategy

Establishing a healthy work environment through promotion of team spirit and constructive criticism will develop a corporate culture in which the employees will flourish.

Organization's ability to improve leadership development encouraging cooperation and support for each team member will result in high employee engagement, job satisfaction, and increase employee retention, ultimately assuring the company's success.

Positive atmoshpere increases employee engagement

Building a positive atmosphere at your company is the fastest and most pleasant among the employee retention strategies. Healthy corporate culture will significantly reduce employee turnover and encourage employees to pursue professional development and personal growth even more than competitive compensation. In this way you develop engaged employees that form the foundation of a dedicated workforce.

Moreover, it doesn’t require any financing and will make your business stand out from the competition in a positive way. This is especially so since cultural toxicity seems to be rampant throughout the corporate world with an average of 10% of employees in the large companies referring to at least one of its elements in the recent Glassdoor reviews.

2. Offer Remote Work Opportunities for Healthy Work Life Balance

In today’s post-pandemic world remote work option is simply the norm. What for some companies was a forced necessity during the Covid-19, now is basically an expected policy for every organization. In fact, employee feedback inevitably points to the fact that remote work boosts retention as 42% of remote employees claimed that if their current employer requests their return to the office they will essentially quit.

Remote work is one of the top employee retention strategies

In that sense, no wonder then that remote work opportunity is 1.5 times more predictive of employee retention than compensation.

Hence if a firm does not yet offer work from home, it will inevitably negatively stand out from the competition. Remember, since the remote work option is so ubiquitous, it’s no longer a perk, but a must-have on your policy list.

Flexible schedules benefit employees and employers alike

Remote work does actually financially benefit both the employee and the employer.

First of all, it presents substantial savings in terms of time and money. During the time of rising gas prices cutting out the commute can amount to measurable financial benefits. Employees, who work remotely, may also choose to relocate to a comparably more economical area, saving even more of his or her paycheck.

Helping to combat the rising costs of living in this way may be a serious alternative to a simple salary rise. Stephanie Naznitsky confirms that often “the conversation begins with starting salary and sign-on bonuses, but [she’s] seen companies get creative in order to help their workers and overall retain top talent.”

Employees cite monetary benefits as the key reason for remote work

In fact, the employees clearly see the financial benefit, as 49% of surveyed workers listed cost savings as the number one benefit of working from home.

Furthermore, companies also benefit from offering remote work options. Cutting down on real estate and office space maintenance will positively affect every organization's budget, especially during the skyrocketing inflation.

In addition, working from home allows the employer to tap into a much larger pool of top talent, at least somewhat alleviating the issues with labor shortage.

And if the fully remote option is not for your business try other HR trends such as hybrid or flexible work model instead.

3. Lateral job opportunities work better than promotions for employee retention

Nearly 77% of employees, in that 84% of millennials, experienced job satisfaction loss leading to a burnout at their current job, as reported by Deloitte’s survey of 1000 US workers. Nearly half of them have quit specifically for that reason. A large majority also believes their current employer is not doing enough to alleviate those symptoms.

One of the surprisingly effective employee retention strategies in which employers may prevent burnout and at the same time boost retention rate is by offering lateral job opportunities.

In fact, the MIT researchers found that lateral professional development is 12 times more likely to improve employee retention than promotions. It turns out that a substantial group of professionals is not interested in climbing the corporate ladder and quite a few want to avoid managing others. These workers are simply looking for a change or trying something new.

Lateral career development boosts employee satisfaction

Offering alternative opportunities without promotion may not only allow a change of pace or provide a fresh perspective but also increase employee engagement, job satisfaction, and expand the existing skillset. In this way, companies promote holistic and multi-directional employee development that ultimately will drive the organization’s success.

4. LTIP offers more value than upfront cash

Salary raises and bonuses, retention and sign-on alike, offered by the employers are short-lived and effective in a very limited sense. With rising inflation and increasing pay competition, they quickly lose power to keep the employees at your company. Therefore, by no means such financial incentives should be a part of the long-term strategy of any serious firm.

So far we discussed strictly non-financial ways alternative to salary competition, but long-term incentives are actually an ideal vehicle competitive companies should turn to in order to improve employee retention.

LTIP benefits

LTIPs provide two key benefits important in today’s fast-paced inflationary environment:

1. They offer a form of equity that at the time of disbursement may be paid out in cash or shares.
2. LTI reward is performance-based and awarded after a 3-5 year vesting period.

What are LTIPs?

Long-term incentive plans (LTIPS) are a form of grant offered for work carried out in the present but paid out in the future. In this way, through careful selection of LTI vehicles, your company may avoid entering the pay spiral, but still, offer an actual financial incentive to the employees without actually putting any cash upfront.

How does an LTIP work?

In addition, the award is based on performance, meaning that you select certain targets that the grantee needs to hit in order to receive the payout at all. In this way, the LTIP motivates the recipient to work effectively and in accordance with the goals set by the company.

LTIPs improve employee retention

LTIPs can be a trading card worth considering also from the perspective of the employee. Such incentives are not a simple bonus but shares or stocks that grant actual ownership of the company. They are also a form of a hedge since on average the stock market outpaces the inflation.

A choice between a prosaic bonus that will be quickly eroded anyway versus a form of a long-term incentive that historically more than beats the inflation should be clear to any professional. And since only about 20% of companies offer LTIPs to employees below the executive level, you have a good chance to positively differentiate yourself from the competition by introducing such new employee retention strategies.

How does an LTIP benefit companies?

In this way, LTIP may be a perfect option for a company that is trying to avoid the trap of the pay spiral. LTIs are not only strong retention mechanisms that don’t require any upfront financing but also through offering ownership they motivate the employee to work effectively and make choices that will ultimately benefit the company long-term.

To find out more about long-term incentives read my Ultimate Guide to LTIPs.

To see how the public companies use LTIPs to compete for executive talent check out the Executive Compensation Teardown.

5. Recognizing your employees for their achievements

Failure to recognize employee performance is almost 3 times more predictive of attrition than compensation.

High-performing employees are typically passionate achievers that value various forms of appreciation and resent the lack thereof. Neglecting your most valuable employees and fostering tolerance for underperformance will drive the talent out of your company.

Appreciation and culture of respect lead to high employee retention

In today’s competitive climate no company is in a position to ignore that. Yet 63% of surveyed professionals who changed their jobs complained about the lack of opportunities to advance and 56% felt disrespected.

Offering both formal and informal forms of recognition may be one of the easiest ways to build strong company culture and improve job satisfaction and therefore employee retention rates. It can also be done in a number of ways from simple praise from a manager or applauding the completion of a group project to a promotion or an LTI grant. Even such a small thing as an endorsement of someone’s idea or just asking for one’s input will make them feel appreciated.

Staying afloat through hard times

Lori Wisper, the managing director at Willis Towers Watson, warns that even though on average the salaries rose in the past year, the competition for labor through pay has serious limitations and may conclude in “an escalation that could never end.” On the flip side, the raging inflation has 70% of employees report to their managers their worries that it will simply erode their pay.

Companies stuck between the forceps of death - skyrocketing inflation on the one hand and the unprecedented labor shortages on the other - must resort to options other than a pay spiral if they want to stay afloat without ruining their budget.

Taking steps:

• to build a positive company culture,
• recognizing your top performers and experienced employees for their achievements,
• offering lateral position alternatives to boost employee engagement,
• and remote work options for better work life balance
• as well as granting LTIPs to a broader group of key employees to boost employee retention rate

will help your organization positively stand out among the competition without upfront cash expenses.

Most of these suggestions cost nothing or will in fact self-finance ultimately benefiting the company long-term.