CFO Pay Raise Plans Fall Far Short of Inflation Rate, Talent War Faces Challenges

Facing the tightest labor market in decades, many CFOs plan to retain employees this year with pay raises exceeding 3%, but this may still not be enough. With inflation far outpacing wage growth and employee turnover at multi-year highs, data from the Conference Board shows that nearly one-third of employees received pay raises of more than 30% from new employers.

Labor market experts point out that CFOs allowing wage increases to lag behind inflation is based on expectations that as the pandemic subsides, workers who temporarily left will return to the workforce, job openings will fall from near-record levels, and wage pressures will ease. However, experts warn that CFOs should not expect wage increase pressures and the talent war to end quickly. The U.S. population is aging, shrinking the labor pool; additionally, many workers retired early during the pandemic, leaving the labor force participation rate at only 62.3% last month, which may not recover to pre-pandemic levels.

Experts suggest that instead of waiting for labor supply to recover and ease wage pressures, CFOs should proactively take measures to attract and retain employees and win the talent war. Peter Cappelli, director of the Center for Human Resources at the Wharton School of the University of Pennsylvania, said: "We assume everything is a labor market problem rather than a people management problem, a public policy issue rather than an employer issue—but that's not the case. Management has many things it can do, and the entire field of people management has been neglected by us."

While raising salaries, CFOs should consider developing incentive plans that link at least part of pay increases to productivity gains. They should also identify the benefits most valued by each employee group, as well as those that can deliver the greatest benefits at the lowest cost. Additionally, CFOs should fund programs aimed at maintaining employee mental health and fostering a sense of community, including training supervisors to build strong connections with their direct reports. These measures will help stabilize the workforce and cushion the impact of inflation.

'Price-Wage' Spiral

Moody's notes that rising consumer goods costs may have triggered a 'price-wage' spiral, pushing up compensation costs. Data from the U.S. Labor Department on Thursday showed the consumer price index (CPI) rose 7.9% year-over-year last month, the fastest pace in 40 years; the producer price index (PPI) surged 9.7% year-over-year in January. The Conference Board said: "A price-wage spiral—where rising prices and wages feed each other, causing both to accelerate—may already be emerging in some industries or regions."

The National Federation of Independent Business (NFIB) said Tuesday that small businesses view inflation as their biggest challenge, with the proportion of firms raising prices last month jumping to a 48-year high. As inflation accelerates, wage growth is slowing. Labor Department data shows that average weekly wages, adjusted for inflation, fell 2.3% year-over-year last month. The Conference Board says nearly two-thirds (62%) of workers worry that inflation will further erode their incomes in the coming months.

Labor Department data on Wednesday showed the quits rate (the proportion of workers leaving jobs relative to total employment) has fluctuated between 2.8% and 3% since June, the highest since 2000. Pew Research Center said Wednesday that 29% of employees received at least a 30% pay raise from new employers, and nearly two-thirds (63%) of workers who quit last year attributed their departure to low pay. Shawn Cole, co-founder of executive search firm Cowen Partners, said: "This is a highly competitive market, unlike anything I've seen. Talent demand is severely pent up."

A Payscale survey of 5,578 respondents involved in compensation decisions (spanning countries including the U.S. and Canada) found that 44% of companies plan pay raises exceeding 3% this year. Some surveys show companies planning raises as high as 5.2%. Despite this, 85% of Payscale respondents worry that raises won't offset inflation. Payscale's chief people officer, Shelly Holt, said: "Employers are busy deciding what to offer new hires and how to structure raises to retain existing staff. Compensation planning has never been more important."

The Conference Board says U.S. CEOs rank tight labor market conditions as the top external pressure point for 2022. "As bargaining power shifts from employers to employees, companies should prepare for higher salary and benefit costs and higher employee turnover rates in 2022."

Workplace Temptations

Experts say companies seeking to attract and retain talent are offering a range of temptations, including signing bonuses, flexible working hours, and higher education subsidies. Catherine Hartmann, North America rewards leader at Willis Towers Watson, said in an interview: "You have to prioritize what matters to employee segments." She advises CFOs to work with HR to identify benefits most attractive to different employee groups. For example, a $2,000 outstanding performance award might be more appealing to a 25-year-old employee than a higher 401(k) match.

Wharton professor Cappelli said: "It would be wise for CFOs to put a little pressure on HR and ask, 'What keeps employees? What's expensive, and what's cheap and easy?'" He notes that signing bonuses and mental health referral services are low-cost and well-received compared to many other benefits. The same goes for tuition reimbursement programs—"they're very cheap because nobody uses them." Cappelli says CFOs can measure the cost of employee turnover by collecting data to determine the return on retention spending. "It's a very simple idea, but most employers don't know the answer, which is embarrassing—quite astonishing." Although many CFOs measure the cost per hire, only a quarter of companies make an effort to track the quality of new hires. He said: "This is entirely CFO-driven. They don't ask these questions because sometimes they don't know what to ask."

Culture Is Key

Jesse Morris, CFO of more than 150 portfolio companies under Main Street Capital, says that since the start of the pandemic, many companies have attracted and retained employees by raising salaries, implementing incentive plans, and emphasizing culture and employee development. These companies have annual revenues between $10 million and $150 million and operate in industries such as construction, manufacturing, energy, and telecommunications. Morris says many companies accelerated streamlining plans after the pandemic, and higher efficiency helped them adapt to a tight labor market and surging customer demand for goods they couldn't source from other producers due to supply chain bottlenecks. Some companies have linked wage increases to productivity gains and improved efficiency by investing in capital equipment, redesigning assembly processes, and emphasizing kanban inventory control.

Additionally, "many companies spend a lot of time and effort creating the right work environment," Morris said. "Pay has to be competitive, but at the end of the day, if the work environment isn't right, you'll lose talent—you have to provide employees with challenges and opportunities for growth." Experts point out that CFOs should not overlook the benefits to recruitment and retention of attention to employees' emotional well-being, both inside and outside the workplace. Hartmann said: "Being treated well, being respected, and knowing you'll receive empathy from your employer when tragedy strikes in life—that loyalty has a profound impact. I've heard many people say, 'I was thinking of leaving a company, but then my father passed away, and how the company treated me showed me about the people I work with and the place I want to be part of.'"

Cappelli says CFOs can improve recruitment and retention at low cost by training supervisors to enhance employee mental health. "The most important factor in retaining employees is social connection," he says. "Perhaps the cheapest investment in keeping people is improving supervisor skills—this could yield the greatest returns." He suggests supervisors have 30-minute calls with direct reports each week. "The first thing you should ask is 'How are you doing?'" He notes that this care must be genuine—"the problem is trying to fake it."