You Can Ignore The Cost of Living

“Why doesn’t my Company consider inflation when determining my pay increase?” Have you heard this question before? What this employee is actually asking is: “Shouldn’t my annual pay increase percentage at least match increases in the cost of living? And, as management is always talking about the company’s pay-for-performance philosophy, shouldn’t my increase be higher than that, given that I’m a good worker?” _________________________________________ 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? Isn’t that like treading water, just staying in place without moving forward? Is that fair? Where is the reward for good performance? Shouldn’t everybody receive at least the inflation rate? 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 pay 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 competitiveness.   Competition and affordability Companies routinely promise to pay competitively, and as such will analyze what they consider the marketplace to learn what other companies are paying for jobs (base salaries) and standards for increases. Their so-called “promise” does not include the granting of inflation-proof increases, or even to reflect the cost of living in their analysis. Their intent is to pay employees a competitive wage – including increases – and competitive means what others are doing, not necessarily what’s happening in the world of inflation. If budget is an issue for any given year, it’s likely that maintaining competitiveness will have to suffer. Consider the past two years of layoffs, wage freezes and reduced increases as recession gripped the country. Is that fair? Well, let’s imagine that your name is the one on the company door. How would you plan to spend your money? Likely you would seek to pay the least that you can, while still attracting, motivating and retaining qualified talent for your business. That doesn’t mean you would lower 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 for any overhead, be it facilities, raw materials or employee compensation. Consider the market for talent as similar to making a purchase at a retail store. How frequently would you pay more than the advertised price if your extra money purchased nothing more than the same item? Chances are you wouldn’t often take that approach. The view from the other side of the desk Now let’s consider the employee perspective. What factors weigh heavily on their minds when considering the potential for pay increases? Most employees expect management considerations to reflect the inflation rate (cost of living), the average increase for their industry/geography (typically as pointed out by newspaper “factoids”), and – if the company had a good year – a share of the financial success. You can be sure that the figure employees have in mind is the highest number calculated from the three possibilities just mentioned. And, lest you forget, that figure is for the average performer; better employees should receive more. Now this view is not necessarily wrong, from their perspective, and one certainly can’t blame employees for a viewpoint that puts their interests first. However, companies typically maintain a “this is a business first” strategy that seeks to minimize controllable expenses without losing sight of their competitive pay target. The goal of paying competitive wages, a concept hard to argue against, 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, or the company has had a good or not so good year, or the media is touting higher or lower industry averages, employee expectations may likely swing from one argument to another, rationalizing a consistently more aggressive pay increase strategy. Now a little tongue-in-cheek: turnabout is not considered fair play. Employees would not want the size of their increases to fall with their chosen economic indicator. It should only rise. They would object to smaller increases if the company hit a rough patch, or if inflation nosed downward. You shouldn’t be surprised that they want their cake and want to eat it too. However management strategies tend to be consistent over time, continually focusing on the marketplace and its affordability to maintain their posture of providing competitive pay and pay opportunities. So how do you avoid a clash of employee expectations with management strategy? If companies would communicate pay philosophy or strategies they would be able to allay the employee guesses and assumptions that always accompany the grapevine and 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 the company determines pay increases. 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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