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Inflation is a challenging economic situation. It puts the squeeze on consumers for everything from the petrol they fill their cars up with, to the groceries they buy. When inflation spikes, it also means that the wages employees earn have less purchasing power—basically handing them a salary cut.
In HR, this is a tricky situation to navigate. Naturally, your employees are going to be interested in a salary inflation adjustment, but not every organization can accommodate a company-wide raise that actually keeps up with inflation.
Even when a salary inflation adjustment is feasible, it may not fully diminish the feelings of anxiety and low morale that inflation can create for your team. Fortunately, it’s not the only option that organizations can take. There are a few tactics that organizations can rely on to ensure they’re helping their workforce to the best of their ability during periods of high inflation.
Here, we dive into what inflation is, how it impacts HR professionals, and what exactly you can do to keep employee engagement high and reduce attrition rates during tough economic times.
The Basics of Inflation
When referring to inflation, we’re talking about the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of money. When inflation occurs in a given economy, each unit of currency buys fewer goods and services than it did before. For example, if the inflation rate is 3% annually, a product that cost $100 last year would cost $103 this year.
The unfortunate reality for many around the world is that 3% inflation is a pittance compared to what’s actually happening. In Singapore, for instance, inflation rose by 7.4% in 2023 which is actually down nearly a percent from 2022—but still far too high, and noticeably increasing the cost of living there.
The impact of inflation is far-reaching and affects all aspects of the economy, including your organization and its ability to maintain pay fairness among employees. As the cost of living rises due to inflation, your employees will experience a decrease in their real wages if their salaries don’t keep pace with inflation. This can lead to dissatisfaction and morale issues within your workforce, and it’s not necessarily an easy fix—it would be nice to have a company-wide salary inflation adjustment, but that isn’t always financially feasible.
During periods of inflation, your organization will face the challenge of balancing the need to remain competitive and profitable while also ensuring employees are fairly compensated for their work. Failure to address pay fairness during periods of high inflation can result in talent retention issues and hinder overall employee morale and productivity. Therefore, it is essential for businesses to understand the basics of inflation and implement strategies to address pay fairness effectively.
Impacts of Inflation on HR
Of all the sectors hit hard by inflation, few feel its effects as intensely as Human Resources. While HR has plenty of tools to solve other problems, inflation often feels like a force of nature that little can be done about. Here’s how inflation tends to affect HR professionals:
Recruitment and retention
Inflation can significantly impact your organization's ability to attract and retain top talent. As the cost of living rises, job seekers may seek higher salaries to maintain their standard of living, making it more challenging for your company to recruit within HR budget constraints. Similarly, existing employees may feel compelled to seek better-paying opportunities elsewhere if they fail to receive a salary inflation adjustment. HR teams must adjust recruitment strategies to remain competitive in the job market and implement retention initiatives to retain valuable talent.
Also, as cost of living goes up locally, employees may seek to move to more affordable communities, leaving the footprint of your organization. And while remote work might be an option, it’s one more problem to solve caused by a spike in inflation.
Read next: The Cost of Recruitment: HR’s Guide to Creating, Tracking and Implementing a Salary Budget
Employee morale and engagement
Inflationary pressures can also affect employee morale and engagement. When salary inflation adjustments aren’t possible and employees feel their pay isn’t keeping pace with the cost of living, it can lead to frustration, demotivation, and disengagement. Your HR team has to proactively address these concerns by keeping open communication channels, listening to employee feedback, and implementing initiatives that demonstrate the organization's commitment to supporting its workforce during times of economic uncertainty.
Creating a company culture that has clear channels for growth within your organization is a great way to combat inflation-caused uncertainty. When your team sees a path for growth and a brighter future, they’re less likely to be overburdened with the anxiety of the moment.
Performance management and development
When inflation hits, your organization might need to take a reevaluation of performance management and development strategies. Your HR team may need to recalibrate performance metrics and goals to account for changing economic conditions and ensure that employees are appropriately incentivized and recognized for their contributions.
Also, investing in employee development programs becomes increasingly important to upskill and reskill workers during inflationary periods. Demonstrating that your organization is invested in the career and personal growth of its employees, even when there are economic pressures, is a great way to maintain engagement and morale.
Compensation and benefits
Among all HR functions, compensation and benefits management is perhaps the most directly impacted by inflation. Rising inflation erodes the purchasing power of salaries, making it imperative for your organization to periodically review and conduct a salary inflation adjustment to ensure its compensation structures remain competitive.
Your team needs to conduct a comprehensive market analysis to benchmark salaries against evolving industry standards and ensure that your employees are fairly compensated relative to their peers. You’ll also need to consider revisiting benefits packages to include provisions that help alleviate financial strain, such as cost-of-living adjustments, healthcare benefits, and retirement plans, which can enhance employee satisfaction and maintain healthy retention levels during a period of inflation.
Strategies for Salary Inflation Adjustment
As your organization looks to navigate this period of high inflation, your HR team is going to play a crucial role in ensuring that employee compensation remains fair and competitive. Here are five strategies for you to consider, that will help manage salary inflation adjustment:
1. Transparency and communication
Maintaining open and transparent communication with your employees about the impact of inflation on compensation is essential. Your HR team should clearly communicate the organization's approach to managing salary inflation adjustment, including the factors considered, timelines, and rationale behind decisions. Providing your employees with regular updates and opportunities to ask questions can help alleviate concerns and build trust within the workforce.
Make sure that it’s not just talk, though. As you outline your action plans and give updates, clearly show the steps taken, and act on employee feedback gathered during your Q and As.
Relevant reads: 15 Employee Satisfaction Survey Questions You Need to be Asking
2. Perform data-driven analysis
Data-driven analysis is necessary for making informed decisions about salary inflation adjustments. Your team should leverage market data, industry benchmarks, and internal compensation metrics to make sure you have the full picture about the impact of inflation on your employee salaries.
By analyzing trends and identifying areas where adjustments are most needed, your organization can allocate resources to where they’re needed most and ensure that compensation remains competitive in the market.
3. Perform targeted pay adjustments
This is probably the go-to strategy for a lot of organizations, and certainly what most of your employees will be interested in. But rather than implementing across-the-board salary inflation adjustments, consider targeted pay adjustments based on individual employee performance and circumstances.
For instance, high-performing employees, those with critical skills, or those in roles that are particularly affected by inflation may warrant higher adjustments. This approach allows your organization to allocate resources strategically while recognizing and rewarding top talent.
4. Provide alternative benefits and support
In addition to conducting a salary inflation adjustment, consider offering alternative benefits and support to help mitigate the impact of inflation on your employees' finances. This could include enhanced healthcare benefits, flexible or hybrid work models, additional paid time off, or financial wellness programs.
Providing real, tangible support beyond salary increases demonstrates your organization's commitment to supporting its workforce during challenging economic times. It also might be easier to extend to everyone than across-the-board raises, making for a cost-effective alternative.
5. Proactive planning and communication
Effective salary inflation adjustment strategies require proactive planning and communication. Your HR team should anticipate inflationary pressures by keeping up to date with economic projections and develop contingency plans well in advance.
By staying ahead of market trends and economic indicators, your organization can implement timely and well-calibrated adjustments that meet both the top-down business objectives and real employee needs. Regular communication with your employees throughout the adjustment process keeps things transparent and helps develop a sense of trust and engagement within the workforce.
Harnessing HRIS to Navigate Salary Management
Implementing effective strategies for salary inflation adjustment is crucial for maintaining competitiveness and retaining top talent.
Affordable, functional, and suitable for modern growing businesses—HRIS solutions like Omni can significantly ease the salary inflation adjustment process. By offering real-time data, automated calculations, and compliance assurance, our comprehensive payroll solution is designed to meet your unique b business needs, no matter where you operate.
Ready to enhance your salary management? Schedule a demo with us today. We’ll walk you through the platform’s features and demonstrate how Omni can streamline your processes, saving time, reducing administrative workload, and enhancing overall efficiency for your team.
