Rewarding and Recognizing Employees at Year-End Amid Rising Inflation

As we approach the end of Q4, annual bonuses, merit increases, and compensation budgeting for 2023 are top of mind for many. As inflation continues to hover over 8%, business leaders and HR professionals are struggling to strike a balance between properly rewarding the efforts of their employees and protecting the financial position of the business. 

Over the past few years, primarily due to the shift in remote work due to COVID-19, we’ve engaged in ongoing conversations around how to structure pay packages and how to determine what the company’s compensation philosophy is on pay positioning relative to geography. The conversations range from structuring salaries based on the location of the headquarters of the company to considering the individual state where a particular employee sits. Consideration has also been given to structuring base pay based on region, casting a wider net for compensation adjustments.  

Employees look forward to generous merit increases to improve their financial positions, as well as to be recognized for their increased responsibilities and expanded working schedules (an outcome of the work-from-home environment). HR professionals are working diligently to present a solid business case for providing the most generous increases possible. Among the most important factors to consider is the cost of turnover. The positive impact of increased spend on merit increases far outweighs the negative impact of the cost of turnover for a business. Predictive Index estimates “the real cost of employee turnover can cost up to five times the position’s annual compensation, depending on the type of role, location, etc.” 

According to Compensation Resources’ recent Annual Salary Budget Planning Survey, participants reported actual average increases for 2022, at 4%. It is important to note that the budgeted amount for increases, on average, was 3.7%. The increase in merit budget pools demonstrates employers’ recognition of the need to provide increased rewards for their employees. While we may see annual pay raises ranging from 4%–5%, even higher percentages may be reserved for talent that is key for the business to grow and succeed, such as high potential/promotion-ready individuals.  

Not to be ignored is the challenge employers are now facing increased benefits costs. As open enrollment approaches, employers are seeing increases in benefits costs anywhere from 6%–10%.  

Considerations When Evaluating Merit Increases  

It is important to clearly communicate the way in which compensation decisions are made by tying performance and career progression to compensation, whenever possible.  When the time comes for increases, it is important to create confidence and trust among employees by:  

Conducting a comprehensive compensation study, developing pay grades and ranges, and using empirical data to determine salaries.  

Considering the impact of inflation on the company’s current compensation philosophy.  

Setting mutually agreed upon SMART (Specific, Measurable, Achievable, Relevant, and Timely) goals that have clear results. 

Providing spot bonuses to reward performance, without carrying an increased payroll cost on the books. 

Identifying and clearly communicating additional value propositions that may close the gap on merit increase expectations (tuition reimbursement programs, wellness offerings, training and development offerings and work life balance/flex schedule). 

Additional Considerations 

Leveraging talent that is already within the company may be accomplished by: 

Upskilling current employees by taking an inventory of the skills within the company through a nine-block activity which leverages current talent based on a 3x3 grid ranking based on both performance and potential.  

Building a bench through strategic succession planning, which is critical to business continuity.  Using a long-term incentive plan as a monetary mechanism by which to increase retention further demonstrates the company’s commitment to building and mentoring its talent pool.  

Seeking to automate current processes and increase efficiency. 

The Bottom Line 

Strategy, transparency, and clear, honest communication are key drivers of a successful year-end process. Carefully delivering the message that employees are appreciated, invested in, and encouraged to continue their engagement with the company is an exercise that carries with it great responsibility, but greater reward when executed thoughtfully.