As the U.S. labor market grew tighter last year, employers responded by raising wages. The U.S. Bureau of Labor Statistics found that, between February 2021 and February 2022, average hourly earnings for private, nonfarm workers grew from $30.04 to $31.58, translating to about 5% growth year-over-year.
But beefier paychecks do not tell the whole story. Real hourly wages have actually shrunk by 2.6% during that same timeframe, according to BLS. In other words, though wages have gone up on average, inflation has negated workers' gains.
Executives have so far been reluctant, in many cases, to push wages even higher out of concerns that the talent situation may improve as workers return to the labor force, CFO Dive reported.
That stance is far from universal, however, as some employers have pushed salary increases beyond the prototypical annual pay raise. In a recent statement, Deloitte disclosed that it had performed an additional compensation market analysis halfway through its annual compensation cycle. This effectively gave many employees a pay raise halfway through the year, "above and beyond what they receive through the annual cycle," according to the statement.
From the exception to the rule
Organizations are increasingly mulling over plans to incorporate more frequent pay increases, according to Tony Guadagni, senior principal, research in Gartner's HR practice. "As of pretty recently, this is starting to come out more and more," he told HR Dive.
In the past, employers may have decided to raise pay for certain workers more than once in a calendar year, "but it was more exception-based," said Lesli Jennings, senior director, talent and rewards consulting at Willis Towers Watson. Top performers in particular may have been rewarded with more frequent increases, she noted.
Today's job market is pressuring employers away from that view. "Given what we're seeing in the market, we really are seeing those types of increases surface more frequently than we have in the past," Jennings said. "We can attract the right talent but also keep the talent that we have."
Short-term incentives are more common than base pay increases, Guadagni said, with employers honing in on spot bonuses. Focusing on such smaller, one-time rewards allows employers to reward employees without locking the employer into market adjustments when economic conditions change, he continued.
Organizations may believe they have hit the ceiling with base pay increases in the current market, which makes spot bonuses an appealing alternative, said Jeanniey Walden, chief innovation and marketing officer at early wage access vendor DailyPay. As raises introduced during the pandemic largely were not enough to match inflation, "that's when I think a lot of companies started to look at money as a driver, and not just pay."
That is to say other financial incentives could fill the gaps workers face. Walden gave the example of transportation credits, such as gasoline stipends and subway fare credits that help workers save on their commutes, or even something as simple as company-provided lunches that could save workers a few bucks daily.
If budgets are tight, Guadagni said employers may still look into establishing a process for "off-cycle" increases, or those that occur outside of a typical pay increase timeline, so that managers know how to approach the subject. That could be helpful in the event that a manager believes a pay increase is necessary to prevent needed talent from leaving.
A fast-moving market
Asked which roles or job types are most likely to be considered for more frequent pay increases, Guadagni said that, while he did not have exact data on this question, employers are likely to offer bonuses in areas showing the most attrition.
Another challenge presented by the frantic nature of the current market is difficulty in keeping organizational compensation benchmarks up-to-date; "They know they need to update their wages, but not by how much," Guadagni said.
Inflation adds to those considerations. Organizations may decide to conduct cost of living adjustments, or COLAs, to ensure workers' salaries can keep up. But the results of a February Gartner webinar poll, which included more than 300 executives, showed that only 23% of organizations would offer COLAs of 3% or more, while 41% planned to make no changes whatsoever.
Even if organizations opt for smaller, one-time bonuses instead of base pay increases, the strategy adds to already heavy workloads of compensation managers. "If I'm a payroll manager and I have to process payroll weekly, and all of a sudden someone comes up to me and asks me to process bonuses, I'm probably going to quit or cry — one of the two," said Walden. "You've just made my life a lot harder."
Jennings similarly acknowledged that adding additional steps to the regular payroll process can be cumbersome, but she noted that there may be a way to build in more frequent, scheduled increases, perhaps on a twice-per-year timeline.
It's not all about pay
Some sources lament the focus on pay increases thrust upon organizations by the pandemic. Walden called the situation "a straight up wage war," illustrated through the example of a strip mall: if a retailer like Target announced a higher minimum hourly wage, adjacent stores and fast food restaurants had to follow suit, or else risk losing out on workers.
"The pandemic did a disservice for many companies and industries because it accelerated and inflated the focus on pay in dollar amounts rather than complete compensation packages," Walden said.
"For some organizations, it's a new muscle to be transparent about jobs and careers."
Senior director, talent and rewards consulting, Willis Towers Watson
While other compensation levers include bonuses, early pay access and other financial rewards, sources also stated that workers have not been attracted to higher pay alone. Organizations, Guadagni said, will need to focus on what they can do internally for certain roles and professionals that competitors can't.
"Compensation plays a part in that, but it's not the entire picture," he added.
A variety of paradigms exist. Jennings pointed to the example of career path modeling, including the ways in which organizations group and talk about different jobs. Employers, she said, might want to consider developing a communication strategy for talking about careers in ways that are precise and relatable for employees. Communication about where people in different roles can advance helps to provide greater clarity for workers as well as employers, she added.
"As an employee, I can hear those terms and words and understand that the job I'm in today [is] at that level," Jennings said. "But I'm really interested in this other job. If I can see the options that exist across the organization, I'm significantly more empowered to determine and understand where I am today versus where I want to go."
Competing priorities may get in the way of developing this type of architecture, Jennings continued, but so do aspects such as time and capability. Most organizations are capable of career modeling, but they need managers and leaders who are comfortable with having one-on-one conversations with employees about their futures. "For some organizations, it's a new muscle to be transparent about jobs and careers," Jennings said.
There are other areas of opportunity. Guadagni said he has seen some clients double down on organizational purpose and messaging around why they are great places to work. Jennings reiterated clearer, more engaging communication around certain organizational transformations also has been a focus.
Then there are the total rewards areas that complement pay, like flexibility, remote or hybrid work, and increased control over setting one's own hours. "I think everybody is trying to double down on these perks, this employee value proposition, what makes us unique and getting managers to talk about those things," said Guadagni. Jennings noted the importance of well-being programs and similar perks that drive employee experience.
Elsewhere, employers have focused on monetary incentives such as stock vesting. Last month, CFO Dive reported on a trend among organizations to allow employees to access the value of their equity holdings earlier, a process known as front-loaded vesting. Amazon, Apple and Google are among the firms reportedly using the strategy.
These ancillary benefits do not necessarily mean employers can ignore pay entirely. "In my opinion [pay] has to be part of the equation," said Guadagni. "If you're not focused on compensation when everyone else is, you're likely to lose."