How should CFOs be approaching pay raises? An expert offers advice

Advice about how much to pay employees is all over the map: Keep up with inflation! Don’t base raise decisions on inflation! Match the competition!

For clarity on how CFOs should be approaching pay, I talked to Lori Wisper, a managing director at the advisory firm Willis Towers Watson (WTW), who is based in Chicago.

Wisper first explains that compensation is determined by the supply and demand of the labor market, not inflation:

-While related, cost of living and cost of labor are two very different economic indicators.

-The salary budget numbers, how fast they go up or down, are dependent on the supply and demand of labor.

-Inflation represents the cost of goods and services that we buy.

-What does pay represent? Your buying power and that’s the relation to inflation and price increases. But you get to choose how you use that buying power.

“The other thing that people don’t take into account is when the media reports 7.5% inflation, that’s a national number,” she says. “The cost of living can be very different depending on where you actually choose to live.”

So, how big a raise should your employees get in this environment? Are there some ideas for how to gauge? 

For about 10 years, since recovery from financial crisis of 2008, the average wage increase percentage has been about 3%, Wisper says. Coming up with a salary budget “is not arbitrary for most companies, especially big companies, where even a 10th of a percent represents millions, maybe even hundreds of millions of dollars in payroll,” she says. 

Companies do look at competitive data, like WTW’s salary budget projection survey, for example, she says. (Companies are now budgeting an overall average increase of 3.4% in 2022, the firm’s January report found.)

“There’s also an element of affordability,” Wisper explains. “It’s not just about competing; it’s about what you can afford.” And employers might get even more specific with the data by looking at what companies in their industry doing, she says.

However, there’s some thought that using salary budget numbers are not necessarily the best barometer of how fast the market is moving for many jobs, Wisper explains. “If you look at year over year, what you’re spending, or what the market data for certain job shows, you’re probably going to see a greater rate than 3% in a labor market like this,” she says. 

A best practice to understand how your company may need to increase pay in the future is to analyze all changes to pay throughout a complete calendar year, not just the one-time event that represents the merit pay process, Wisper advises. 

But in the war for talent, “there’s also an element of how organizations compete for labor like, how do you differentiate yourself from the pack?” she says. “Because just paying people more is not sustainable. Late last year, Amazon’s starting salary for hourly wages went from $15 to $18 an hour, on average,” Wisper says. “Target announced last week they’re going to $24 an hour in some locations.”

“This is like War Games,” she quipped. “It’s an escalation that could never end.”

“The employee experience side of this is going to win the day,” Wisper says. “Yes, you’ve got to pay well, but you also have to provide a holistic, great employee experience,” she says.

But millions of people are watching TikTok videos on inflation and wages, and some employees are even sending them to their employers. “Clients send me the TikTok videos they’ve received, and I have to say, it’s people sort of screaming from the rafters, ‘If you’re getting a 3% salary increase when inflation is in the 7% range, that’s a pay cut,’” Wisper says. The explainers she’s seen on this hot topic are all wrong, she told me.

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

A recent PwC Pulse Survey gauged executive views on business in 2022. Labor costs will have the strongest impact on corporate margins this year, according to the report. Almost half (48%) of executives surveyed named talent acquisition and retention challenges the biggest risk to achieving growth goals. The findings are based on a survey of 678 executives, including CFOs and finance leaders.

Going deeper

In a new piece, How women of color can drive corporate transformation, MIT Sloan Management Review (SMR) interviewed Deepa Purushothaman, one of the youngest people and the first Indian American woman to make partner in Deloitte’s history, about her new book. "We've had a system where, in order to succeed, you have to give up who you are—sometimes even your beliefs, your time, your health, or your mental wellness—and the structure rewarded that approach with more promotion and more pay," Purushothaman told MIT SMR.  

Leaderboard

Kristin Caltrider was named EVP and CFO at Inogen, Inc. (Nasdaq: INGN), a medical technology company offering respiratory products, effective March 21. Caltrider succeeds Mike Sergesketter, who joined the company as interim CFO in December 2021, and will remain with Inogen through June 24, 2022 to facilitate a smooth transition. Caltrider joins Inogen from Quidel Corporation, where she most recently served as VP of finance since June 2014. Caltrider first joined Quidel in 2007, where she held roles of increasing responsibility. Prior to joining Quidel, she spent almost four years at Life Technologies (now Thermo Fisher), where she held a number of positions.

Lauren Silvernail will retire from her position of EVP and CFO at Evolus, Inc. (NASDAQ: EOLS), a performance beauty company, effective May 31. The search for her successor is already underway, according to the company. Since joining Evolus in 2018, Silvernail assembled a team that built the commercial infrastructure to support the company and led the restructuring of the balance sheet and financing of the business.

Overheard

"Airbnb is suspending all operations in Russia and Belarus."

—CEO Brian Chesky said in a tweet. Airbnb joins a growing list of private companies severing their ties to Russia, as Vladimir Putin’s invasion of Ukraine escalates and Western countries impose economic sanctions, as reported by Fortune.