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.

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See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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