The Raises Keep Coming and Coming

Back in late 2020, many employers expected they would wind up giving employee raises of around 3% by the end of 2021. It turned out that they paid, on average, a lot more.

Now, employers estimate that they’ll have to raise salaries by an additional 3% to 4% in 2022. The question is, are they once again underestimating what they will have to pay to attract and keep their workers?

According to the Bureau of Labor Statistics, over the past year, workers’ hourly pay has increased by 5.7%. Except for a two-month period during the early days of the pandemic, it’s the fastest-ever move in wages since March 2007. Wages and salaries, a figure that includes people not paid by the hour, rose 4.4% in 2021, is the highest increase in 20 years. 

Some job categories, such as data analyst and trucker, saw double-digit salary increases, while many employers used high-priced counteroffers to keep some employees from leaving. That’s not including any merit increases, says Don Lowman, Korn Ferry’s leader of the firm’s Global Total Reward practice. “It’s what they paid to hire or keep people,” he says. Companies are leery of taking base salaries much higher, Lowman says, because they worry that significantly higher wages, combined with inflation that shows no signs of abating, could wind up swamping profit margins. 

However, companies might not have much choice on wages, at least in the short term. There are still 10 million open positions nationwide, and the unemployment rate, at 4.0% as of January, remains near historic lows. 

Experts suggest using variable pay as much as possible to either attract or retain top talent. Already, spot hiring bonuses are being used for positions that never offered them before. At the same time, long-term incentive plans, often featuring stock options, are being rolled out to employees below the executive level, something Lowman says hasn’t been done much since the 1990s tech- bubble heyday. “As long as the talent crunch continues, we’ll see various attempts to be creative in rewarding people rather than juiced base salaries,” he says.

One thing might put a halt to rapidly rising wages, at least in some industries: a significant pullback in the stock market. “We’ve seen the story in banking time and time again; as soon as the market shifts the entire exercise turns toward cost cutting,” says Michael Givner, a Korn Ferry senior client partner who works with commercial and consumer banking firms. Of course, a declining market doesn’t just eliminate the incentive to raise wages, it diminishes the capital companies have for mergers and other strategic acquisitions. It also makes stock options less attractive to many employees, who don’t like seeing their future incomes falling.