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On Thursday, Federal Reserve Chairman Jerome Powell revealed that inflation reached a new 40-year peak in February, buoyed by supply problems and strong consumer demand in the United States.
This year’s economic buzzword, however, is not what is driving pay increases, compensation experts say. Bill Dixon, a consultant for compensation advisory firm Pearl Meyer, noted that cost of living has not been an element of most employers’ salary planning and budgeting for a “very long time.”
“Companies that are located in high-cost areas tend to have an adjusted pay structure that allows them to compete in those environments,” Dixon said. “But employers pay the job rates that they need to pay to attract and retain talent.”
Dixon said an argument could be made that for most of the 2000s, salaries have not kept pace with economic growth in the US.
“For the longest time, the average salary increase budget was right around three percent,” Dixon said. “Overall, that was unrelated to supply and demand issues and also what was percolating in the broad American workforce. It was really its own indicator and it stayed very stable.”
One of the key variables in attracting and retaining workers in this new employee-driven environment has been salary increases. But ultimately, Dixon emphasized, the drastic adjustments to salary increase budgets are the cause of an extremely tight labor market, which is causing organizations to pull out all the stops financially to retain and attract talent.
“Human capital is essential for companies to execute their strategies,” he said. “If they have shortages or an underqualified workforce, it creates risk for them, so what’s really driving this is more of the demand side.”
Employees are increasingly in demand and well aware of the fact they are in demand, which has factored greatly into the 4.25 million workers per month who have left their jobs. Organizations that are not prepared to embrace this shift in power will fall behind, Dixon said.
“What’s also going on is employees—for the first time probably since Y2K—have more bargaining power versus the employer,” he said. “You see increases in unionization, that’s an indicator. You’ll continue to see more turnover at poor employers who don’t demonstrate the value for human capital. They will have the toughest time attracting talent and instead of reforming themselves, they will probably just pay higher.”
Underscoring this transitional period is the increased interest both investors and consumers have in a company’s human capital strategy, which has led to an increase in transparency that Dixon said will continue to fuel above normal pay increases.
“There is a broader trend going on here,” Dixon said, “which is investors want to know [a company’s human capital metrics and philosophy] and the public wants to know, and employees want to know as well.”