January 24, 2023
The Value of Cost of Living Raises
It is nearly impossible to find data about compensation increases without inflation figuring in every discussion. In 2022, amidst the first global pandemic in over a century, the average price of gas skyrocketed to $5.75 per gallon (up from a low of $2.68 in May of 2020). The inflation rate for 2022 finished at 6.5%, and today (for the moment), gas prices sit as low as $3.49 in some areas. The federal minimum wage will increase to $9.50 per hour this year, varying significantly from state to state. You can visit The Horton Group page on minimum wages for the state-specific wage rates.
Investopedia.com defines inflation as “a rise in prices, which can be translated as the decline of purchasing power over time.” Among today’s inflationary pressures we can count damage to crops, livestock, lives, and property from recent climate change events, Russia’s invasion of Ukraine spiking the costs of natural gas and grain, and a new strain of avian flu resulting in eggs at $6.00 per dozen. The pandemic itself was a force majeure expense for everyone, with shortages ranging from microchips to baby formula.
And yet, we have emerged from this tough time with an appreciation for U.S. workers that we haven’t experienced since the 1950s. Employers continue to be affected by the great labor shortage and unexpected increases in opportunities, pay, and benefits for workers. Driven in no small part by younger workers unwilling to settle for low-wage gigs, companies have been hiring at significantly competitive salaries and vying for new workers by burnishing their employer brand as emphatically as they do their brand. Things have changed.
BDO USA, a global accounting firm, anticipated that budgets for merit increases in 2022 would hover around 3%, but found that in the final quarter of 2021, the increases topped out just below 4%. The talent shortage had pushed raises into the 4% range. Concurrently, inflation was approaching 1982 levels, which BDO anticipated would push salary increases still higher (the term for this is a wage-price spiral, which Americans last heard about in the mid-1970s). BDO conducted a poll of 440 organizations across multiple industries--including 127 nonprofits—in January and February of 2022 and determined that compensation budgets for all participating companies averaged 5.1%, with nonprofit firms averaging 4.4%. The last time salary-increase budgets exceeded 4% was in 2001.
BDO cautioned, “For nonprofits, this may be a significant shock for their 2022 budgets, as a 4.4% budget increase represents a 47% hike (emphasis also mine) compared to the previously standard 3% budget. It is likely that many organizations are not in a position to increase salary budgets to this degree.”
Journalist and social media strategist Lia Tabackman succinctly laid out the good and bad news in her article in 501c.com, Nonprofit Compensation Battles with Inflation: “Salary and wage increases at U.S. organizations have not kept pace with the rising prices of inflation, and recent trends suggest that in many cases there is financial gain to be had from leaving workplaces that can’t keep up. To put a fine point on it: employers who aren’t able to provide compensation increases that account for inflation risk losing their employees to those who can.”
Fortunately, there are plenty of voices in the for-profit and nonprofit worlds who offer useful guidance in addressing the challenge. BDO suggests inflation’s impact on salary gains will vary by situation. Here are some of their tips to bolster your workforce.
- As energy prices rise, consider extra financial support for employees that need to commute by car or drive as part of their job duties. This can be delivered in the form of gas cards, parking vouchers, or passes for public transportation.
- If increasing your budget for merit increases is not feasible, consider doing a mid-year assessment to determine whether a second pay adjustment is needed and can be supported.
- Identify personnel that are mission-critical, as well as top performers to ensure their contributions are recognized and reflected in pay levels according to the organization’s pay policies and financial condition.
- While there are always exceptions, lower wage employees are the most impacted by inflation. Their salary increases typically do not result in a significant change in purchasing power. Focus salary increase dollars on those who are most impacted.
- Allocating more of the budget to pay increases for lower-paid employees can do more than just promote retention, it can help differentiate your organization as one that prioritizes fair compensation practices and demonstrates that management values its employees.
Lauren Mason, senior principal for the Career Business Division at Mercer (an HR consulting partnership) made these recommendations for employers to consider for this year's compensation planning period:
- Prioritize Hourly Pay. With unprecedented levels of churn in the labor market, wage growth at record pace and increasing external scrutiny, now is the time to focus on hourly pay strategies.
- Consider A Segmented Approach. Ensure budget dollars "are focused on addressing gaps in competitiveness . . . Consider a segmented approach by offering higher wages to both new joiners and high-performing current employees in critical business segments, as well as those whose pay is below market rates.
- Keep In Mind The Employee Experience. Employees have heightened expectations around pay, so equip leaders with the resources to communicate pay decisions effectively.
CapinCrouse, a national CPA and consulting firm serving nonprofits, provided the following from their three-part series Inflation’s Ripple Effect on Nonprofits and Their Employees.
- Nonprofit compensation is enough of a puzzle without the added challenge of market fluctuations. But while every organization is different, there are options for leaders who want to communicate the value of their team members through more than just cash compensation.
- Many nonprofits are opting to give their employees one-time bonuses rather than setting themselves up to maintain promised increases in future years. This provides an immediate benefit to employees who are feeling the real-time impact of market conditions without setting the precedent of an increased baseline wage.
- Since times of economic inflation tend to put more strain on lower-level (and lower-earning) employees, nonprofits may also want to consider providing tiered incentives such as:
- Increased retirement plan contribution percentages
- Stipends to accommodate elevated gas prices (consult with a tax advisor first to ensure they understand and disclose the potential tax implications for the organization and employees)
- Higher merit increases or one-time bonuses
In March 2022, hundreds of nonprofit workers gathered in New York City to demand that the city write a minimum wage of $21 per hour and a 6% cost of living adjustment into the city budget for nonprofit workers. Minor Sinclair, Executive Director of The Center for Progressive Reform (CPR) wrote for The Chronicle of Philanthropy to explain how CPR increased their employees’ wages, beginning with a “contingency fund” to augment salaries to help offset the impact of inflation. Staff members received a $1,000 payment from the fund in spring 2022, which CPR planned to renew in the fall. CPR also upgraded employees’ benefits packages, including a “modest allowance” to help cover utility and internet costs for staff working from home. Employees also received an extra week of vacation to be taken at the end of the year. Additionally, CPR made short and long-term disability-pay plans available to staff.
It is important not to lose sight of the fact that the nonprofit sector is the third largest employer in North America, employing one out of every ten working Americans (about 12.5 million workers). Think about the strength in those numbers. If nonprofits can't retain quality employees, their fundraising and program delivery will suffer. During tough economic times and good, investing in people pays dividends for your nonprofit’s present and future successes.
This blog post was written by Amélie Frank, consulting copywriter to UST. To learn more about Amélie’s professional portfolio you can find her online at https://www.linkedin.com/in/amelie-frank/.