3 Ways to Address Pay Fairness When Inflation Is High

January 14, 2022

Contributor: Teresa Zuech

With U.S. inflation reaching its fastest pace since 1982, HR leaders must be prepared to address pay fairness in their organizations — regardless of whether they are adjusting wages.

According to a Gartner survey of 71 organizations on December 15, 2021, a little more than a third (37%) of organizations are planning to factor inflation into their compensation budgets or decisions, yet only 13% intend to increase pay for all employees due to inflation. But the inflation trend is not abating. 

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“Organizations that don’t adjust pay to match inflation are likely to face additional turnover as employees take the quickest, easiest route to higher pay in a competitive job market,” says Tony Guadagni, Senior Principal in the Gartner HR practice. “In fact, Gartner research from 3Q21 shows employees expect a 10.5% increase in total compensation on average when switching employers."

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3 ways to address pay fairness when inflation is high

Moving forward, not all organizations can or will choose to adjust pay based on inflation. Still, HR leaders can minimize the impact on turnover by addressing employees’ pay concerns clearly and frequently. We recommend organizations take three actions to address issues of pay fairness at this time:

No. 1: Proactively address employee concerns about pay

Whether employees are being paid fairly or not, their perception of the matter influences their decision to stay or go.

Rather than waiting for questions from employees, proactively address potential concerns, in particular where misconceptions exist about disparities. Help employees understand what they would make in another job or how their current pay compares to the market. 

One leading organization implemented a pay transparency pilot that shared how individual employees’ pay compared with those at other organizations in advance of compensation conversations. The company plotted employees’ base pay, total cash compensation and total direct compensation against a competitive range for their position. This approach helps employees understand how their compensation compares to the market and nullifies assumptions propagated by external sources. 

Employees will talk about pay and inflation and whether organizations raise the issue or not. According to 2020 Gartner research, 50% of employees discuss pay with one another, up from 38% in 2018. Given this, it's wise to get out ahead of explaining the reasons pay is not increasing, such as your deferring action while you analyze longer-term trends in inflation and the job market. 

No. 2: Adapt communications over the short and long term 

“Communication about pay is not a one-time activity — and employees want to hear about pay regularly,” says Guadagni. 

According to the 2021 Gartner Employee Perception of Pay Decisions Survey, nearly half (45%) of employees want to receive communications about pay at least once a month, but only a third actually do. 

This indicates that you must adapt how and what you communicate as employees’ needs change — both in the short term and the long term. 

For the short term and after initial communication about pay and inflation, collect FAQs and update pay resources accordingly. You can source these questions yourself or lean on individual managers.

For the long term, as employees' understanding and the business environment changes, different pay topics will take priority. Continually monitor employee concerns and update pay resources and training accordingly. 

No. 3: Prepare managers to clearly communicate about pay 

Gartner research shows that about half of employees (47%) prefer to hear about pay from their direct managers. Guadagni notes many managers don’t feel confident discussing pay, and yet these conversations will only get harder when they have to address inflation. 

You can prepare managers for these conversations in three ways: 

  1. Identify employees likely to have concerns. This allows managers to develop thoughtful responses and offer possible solutions, if available. 
  2. Teach managers how to respond with empathy. Pay is always a sensitive area, but even more so when employees feel underpaid due to inflation. Be intentional about guiding managers on how to have empathetic conversations when discussing the topic.
  3. Narrow managers' responsibility. Managers are often overwhelmed by the amount of information and topics they’re expected to cover in pay conversations. To assist, communicate to managers exactly what they do and don’t need to be prepared for.

In short:

  • Whether employees are being paid fairly or not, their perception of the matter influences their decision to stay or go.
  • Moving forward, not all organizations can — or will — choose to adjust pay based on inflation. 
  • Still, HR leaders can minimize the impact of turnover by addressing employees’ pay concerns clearly and frequently.

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