The April data releases across the globe point to the soaring inflation as one of the most pressing current economic problems worldwide. Consumer Price Index for EU 27 countries has been consequently rising in recent months to 7.8% as of April 31st, with some of the members reaching as much as 15% year to year pace.
Federal data from the US point to a whopping 8.26% - levels unseen since the 1980s. The United Kingdom at 7% this month is facing the highest inflation in 30 years. Not to mention other parts of the world with some of the G20 countries like Turkey and Argentina already passed the dangerous levels with 70% and 55% respectively.
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.
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.
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.
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.
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.
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.
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.