Giving your employees a raise based on inflation? That may not be a good idea

Does an employer have to increase wages for inflation to be competitive in the war for talent? Technically, no. But large companies are doing so. 

A new report by Fortune senior editor-at-large Geoff Colvin delves into this topic. “Compensation—encompassing salary, paid time off, sick leave, parental leave, and other benefits—is often determined by the labor market, which, like all markets, reflects supply and demand,” Geoff writes. “It doesn’t directly reflect inflation, nor does it need to.”

He continues, “Think of it this way: For most of the past decade, U.S. companies have budgeted annual salary increases of about 3% on average.” Inflation rates have been well below 3% for most of that time, yet “there was no talk about lowering salary budgets to meet them,” Lori Wisper, a compensation consultant at Willis Towers Watson in Chicago, told him. 

Pay doesn’t necessarily have to increase just because inflation goes up—but many large employers do plan to raise salaries in 2022. Amazon.com Inc. is more than doubling the maximum base salary it pays employees to $350,000 from $160,000.

Payscale’s 2022 Compensation Best Practices Report found 44% of companies plan to raise worker pay by more than 3%. This is the highest rate of companies giving more than 3% pay raises in six years, Fortune reported. But most employers aren’t giving pay increases to match the inflation rate of 7.5% reached in January. 

In making pay raise decisions, companies should remember a fundamental principle that “compensation is inextricably linked to the supply of and demand for workers,” Geoff notes.

“Inflation could prompt those who took part in the Great Resignation to return to work,” he writes. “After all, labor force participation, which plunged in the pandemic’s early days, has only made a halfway comeback. Analysts predict the remaining half will eventually return to work, but higher inflation could incentivize them to act sooner. Ironically, an inflation-induced increase in labor supply would put downward pressure on pay.”

What’s a best practice for giving raises? “Employers should pledge to offer salaries that are competitive in relation to the marketplace and employees’ skills,” Geoff writes. You can read more here. 

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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Big deal

The 2022 BDO Retail CFO Outlook Survey takes a look at the current state of business and expectations for the year ahead. Retail CFOs in the U.S. self-assessed their organization's performance, according to BDO, which delivers financial advisory services. Thriving is defined as profitable and robust growth, and surviving refers to breaking even and remaining stable. Meanwhile, struggling means unprofitable and losing out to the competition. Almost half of CFOs said their company is surviving in 2022. The percentage of CFOs who said business is struggling decreased to 27% in this year, compared to 41% in 2021. Looking head, 46% of finance chiefs said they plan to pursue gradual, continuous growth. About 33% said they expect revenue to increase 1-9% this year. And 24% indicated a 10-25% increase. The data is based on a survey 100 retail CFOs, 50 at pubic companies and 50 at private companies. 

Going deeper

Global Pension Assets Study, released on Feb. 16 by Willis Towers Watson (WTW), found global institutional pension fund assets in the 22 largest markets reached a record $56.6 trillion at the end of last year. During the same annual period, pension assets have increased in U.S. dollar terms by 11.6% in Australia, 8.5% in the U.S. and 7.7% in the U.K., according to the firm. Meanwhile, a 1.1% decrease in Japan’s pension assets means "the U.K. has overtaken Japan to reclaim the position of second-largest pension market," WTW noted.

Leaderboard

Michael Cole was named CFO at eMed, an at-home test verification technology company. Prior to joining eMed, Cole founded SevenSaoi Capital, a private equity investment firm. He previously held positions of increasing responsibility with Madison Dearborn Partners, a Chicago-based private equity firm. He was a managing director of the firm's Telecom, Media and Technology Services Team.

Kevin Collins was named CFO at Neustar Security Services, a provider of cloud-oriented security services. Collins has over 25 years of senior executive experience. He joins Neustar Security Services following eight years as CFO of 20-20 Technologies. Previously, he served as CFO of AgaMatrix, HCPro, I-Many, and Commercialware.

Overheard

“The pandemic has untethered millions of people from the need to be in office five days a week. As people get more flexible, fewer people are going to be in permanent residences.”

—Airbnb CEO Brian Chesky explains the growth in bookings for longer-term stays, as told to CNBC.