How do HR and People teams solve a problem like inflation?
This one is not an easy one…
The background…
The cost of living is rising across the globe and both employees & leaders are looking for support and guidance.
That means, right now, there is one question on the lips of every founder and People Person in tech and beyond:
How do you solve a problem like Maria, sorry, I mean inflation… And unlike Maria, this problem will not dance off into the sunset anytime soon.
In this article, we provide a practical guide on how you can deal with inflation. From emotional support to having a clear compensation philosophy, we’ve got you covered.
How does inflation impact pay?
To keep it simple, pay does not follow inflation. They are two different things a company needs to bear in mind.
Inflation — a general increase in the prices of goods and services where your purchasing power is decreased
Pay — The money you receive from your employer, based on the supply, demand etc within a given market.
So, pay is driven by market forces, i.e.
What is the cost of hiring a Head of Design in a VC backed, Series A company in London?
The answer is a combination of geography, experience, capability, supply and demand. Over the last 5 years, pay has outstripped inflation significantly, particularly in tech.
This is where salary benchmarking comes in and why it is so important to get that market data.
Should our salaries be increasing to compensate for rising inflation?
Whilst salary growth rates and inflation rates follow similar(ish) trends, they are driven by very different factors as mentioned.
To show you the difference, US inflation in July 2022 was 8.5% year-over-year. Still, companies are budgeting an overall average increase of 4.0% in 2022 and 4.1% in 2023, according to a Willis Towers Watson survey. This means that wages are rising slower than the cost of living.
Salaries are typically slow to increase over time — companies need to make decisions for the longer term.
This is especially difficult with something as changeable as inflation.
Take the 2007–2009 economic crash as an example, it’s taken 10 years for salary growth to return to a point vaguely close to pre-crash levels!
Companies are therefore in a risky position when it comes to making short term decisions that could influence the viability of their long term compensation strategy.
This is because any decision they make will have an impact on both the sustainability of operations as well employee engagement, which can lead them down paths towards less profitability and employability over time.
What does this mean for employees?
Let’s think of it this way; if companies increase salaries in line with inflation increases, what happens when inflation rates begin to drop? Will companies drop salaries to match? Very unlikely — think of the impact on morale and employee turnover rates.
So we’re in a bit of a bind. Cost of living is increasing, purchasing power is decreasing and in the UK and EU, companies are also seeing weaker currencies.
Employees are concerned, and I do think it’s the role of a People team to take steps to help them. On that, employers who say they will act and then don’t will suffer from the retention sooner rather than later…
What practical actions can I take?
So we’ve set the context — but what can we actually do to communicate with teams and give them some much wanted guidance and help?
Create a clear compensation philosophy
The first and most critical step we advise companies to take is to build a compensation philosophy.
Getting compensation strategy right is an art and a science, and this one falls under the art section.
As my friend Mary Jantsch defines it in a recent blog:
A Compensation Philosophy is an explicit overview of a company’s views and decisions about total compensation.
Compensation Philosophies are specific to how your company wants to balance revenue growth and profitability, with team member growth, market forces, geographical influences and the unique talent required to achieve your specific core growth metrics.
The real point of a compensation philosophy is to provide transparency and clarity over how salary decisions are made. It’s not enough to just give teams numbers in this environment — they want to know how the numbers were defined in the first place.
It provides the ability for businesses to be sustainable, but it also provides employees with context so it’s a step in solving for the two issues stated above — employee morale and viability for the business long term.
I’ll dive into this more deeply in a post soon, but fundamentally you need to decide on:
- Market Position — What percentile do I need to pay to attract talent in each function — Carta have a great blog on this
- Geography — What is our view on geographical differences — do we pay the same around the world? Do we split by country, or by city? Do we take cost of living into account?
- Levelling structure — How many levels do we have in the org and how do we map these to the compensation benchmarking provider we used?
- Total Compensation Mix — How does basic pay combine with any equity, bonus or benefits and can we map the total value?
- Transparency — How transparent are we going to be? Nifty continuum below from the Kleiner Perkins People report 2022 and since this is a big one, a nice video from a recent webinar I did on the topic with Figures.
- Performance — How do performance and pay relate, what are our cycles?
Then once you have this — put it in a Notion doc and make sure you also take time to educate managers and the team. Comms is EVERYTHING right now.
Run a salary benchmarking exercise
Getting a clear picture of where you currently stand in relation to external benchmarks but also internal equity is an important place to start in order to know what you currently pay, what you should be paying and what you can afford to pay going forward.
Benchmarking employee salaries helps to highlight inequity and where you may have unconscious biases coming into play such as the effect of tenure on salary.
In order to do this right, you have to bear in mind that compensation benchmarking is an art and a science — you have to think about everything we covered in the compensation philosophy aspect, as well as getting comfortable with managing data and handling levelling and progression.
There are a few simple ways of doing this:
If you just want the data, but nicely cleansed and easily used and dont want to upload:
If you just want the data, but a touch more raw and you’re happy to upload your own:
If you want the data AND the help making sense of it:
Get in touch with us — less pretty dashboard, more human help 😉
Targeted financial support
Inflation and the rising costs of living affects us all but not in the same way.
For those on lower incomes, the cost of living rises can mean not being able to afford the essentials and in the worst cases, not being able to make rent or bill payments. The Learning and Work Institute Report on The cost of living crisis and its impact on low-income Londoners predicts that “with energy prices forecast to rise further, the poorest 20% of households in London face inflation rates that are 1.8 time higher than the richest 10% of households” and “Londoners’ non-discretionary spend will increase substantially, with the lowest income households in London required to spend more than 80% of their budgets on essentials, such as food, energy and housing”.
With this in mind, consider providing financial support for those that need it the most in the form of one of bonuses for employees that earn below a threshold amount. My friend Jessie wrote a great post on this yesterday — and in the comments she gives more insight into the way they approached internal comms:
One off adjustments
We’ve seen companies providing one off cost of living bonuses or adjustments, an increase in other benefits such as allowances.
Companies have been doing this far more over the last six months — but fundamentally — it’s a very risky box to take the lid off from. If you take this path for all employees — what happens if inflation keeps going up in 3 months, 6 months, a year? The expectations will have been set.
So if you’re going to do this — look at making it targeted to those in need, or via company / individual combined performance bonuses. The former designed to make it clear that you’re all in it together.
Provide financial education and advice
For this part, we’re not saying you should become a financial advisor to your team — but you should make it clear that you are being as transparent as possible on the market situation, where your company is in relation to that and point them in the right direction for services where they can provide mental support.
Companies like https://www.oliva.health/ are wonderful for improving mental health resources across the board.
Even better — point them in the direction of https://www.ottofinance.io/ — where their purpose is to improve financial wellness.
At the same time — it’s not the point to drop the ball — particularly from your managers — so make sure they’re keeping a close and empathetic eye on their teams.
Communicate market realities
Finally — Education, context and transparency are key to communicating the realities of the situation to your teams. This quote from Ciara Lakhani, sums it up beautifully:
“Handling inflation in compensation is a tricky topic. We want to do right by our employees and for us that means in a way that can be sustainable long-term. As many large international companies know, providing salary raises tied to cost of living can easily become an unaffordable, chaotic practice that may set an expectation the company is not able to live up to over time.
At the end of the day, the economics of compensation are a matter of supply and demand, even in times of low inflation, cost of living is not evenly accounted for across markets. I suggest educating employees about this reality even if of course at the end of the day we can’t blame them for trying to ask for more salary.”
Salary conversations shouldn’t be a battle of two sides (employee perspective vs business perspective) and frustration around pay often comes from lack of transparency, communication and context. It’s important for employees to understand all the factors that go into salary decisions and that includes market realities.
Conclusion
To sum it all up — this is a problem that will not magically disappear and now is the time to act on the actions above. For those employers that do, not only is it the right thing to do, but you’ll also be respected far more by your team for taking the time to be open and honest with them.
Additionally, if you do take the right steps — it’s likely you’ll be rewarded with far better employee retention for it.
Take the time to:
Plan
Benchmark
Build a Philosophy
Communicate Market Realities
As always — if you need any help on the above, we at The People Collective are here to help solve these scaling challenges for teams of any size.
In particular, if you want help building a comp philosophy, or getting humans to help with your levelling then do not hesitate to get in touch.
Or if you’re a people person or founder who just wants to book some time in for support on this — i’ve made my calendly open here —
