How Much Should You Raise Salaries to Match Inflation?

If you’re serious about giving your employees a pay bump, a few factors will contribute to how much that should be. First, your industry, region, and business costs will influence how you raise employee wages. Other factors include your employees’ skill sets, experience, current market conditions, and inflation.

With inflation soaring at 8.5%, most businesses plan payroll increases of 4 percent or more. But, unfortunately, these planned salary increases will continue to lag behind inflation. And with a rise in inflation comes employee expectations of wage increases. So how much should you raise your salaries if you can?

How much to raise salaries varies by industry

Every industry accommodates the need for pay raises differently. However, there are common themes that any industry can use.

• A position-based salary increase uses the market rate for specific positions to determine how much each employee should receive.
• Merit-based pay rewards employees based on their individual performance, rather than their position within the company.
• The pay bands option sets a range of salaries for specific positions and then gives employees a percentage increase within that band based on their performance.

No matter what system is chosen, make sure that all employees are given fair and equitable raises. Now, read on to discover more about salary trends of 2022. We’ll look at additional ways to determine salary increases, the pros and cons of raises, and how to remunerate raises with inflation.

First steps when raising employee salaries

To decide how much you need to raise your salaries, you’ll need to do a few things:

• First, understand the rate of inflation in general and in your industry.
• Know crucial business goals and how much money is needed.
• Know what competitors are paying for similar positions.
• Understand the value proposition of your company.
• Be able to tell workers why they should work for you instead of your competition.

Once you’ve crossed these off your list, it will be easier for you to communicate with employees about salary increases, benefits, and packages.

Compare your competitors’ salaries

If you’ve established your company’s philosophy, goals, and budget, look at the market to determine what your company’s pay grades and salary ranges should be. You can use a benchmarking tool like Zenefits which offers real-world salaries to better understand your company’s wages. Data like job descriptions, geography, and industry can inform you of how much you should increase your employees’ salaries.

Even as an SMB owner you may think you’ll have a hard time competing with larger companies. That doesn’t mean you have to miss out on talent, because work is no longer about compensation.

While equitable and fair pay will always remain a top consideration, people are also looking for companies like yours that care about employees and their work-life balance. Your employees will want things like flexible work schedules and non-monetary benefits you can offer.

The pros of raising employees’ salaries

If you haven’t yet determined if you need to raise salaries, here are a few reasons you should.

Employees feel appreciated and respected when their salaries are increased. When you give raises you prove to your employees that you value them. Salaries also provide financial security, which can boost employee morale and productivity.

You’re a business owner and you need to keep your employees happy. They’ll be more likely to work hard and stay with you when they’re comfortable and motivated. As an employer, this is great — you want dedicated workers who are invested in the success of your business.

Employees feel appreciated and respected when their salaries are increased.

When people are paid more, they have more money to spend. Over time, as incomes increase, so does the purchasing power of a person’s salary. Each additional dollar earned can purchase more goods and services. This is why it is important for people to receive pay increases regularly. However, inflation can eat away at wage gains especially when inflation is as high as it is now.

The negatives of raising employees’ salaries

Raises are seen as rewards given to employees for their hard work. An increase in the cost of living or higher profits often inspires pay raises and companies should regularly provide them. There are some benefits to giving employees a larger raise, such as improved morale and reduced turnover.

However, these benefits may not outweigh the costs if the increase is too large. Suppose your company has 100 employees and you give each employee a 10% raise. That amounts to an extra $10,000 per month — or $120,000 per year.

Another concern is that when pay increases are granted disproportionately to specific employees, it can create a sense of division. So then, what do fair pay raises look like? Reward your employees based on performance, skills, experience, and the industry and location in which they operate.

Other worries include employees failing to recognize the costs that go into pay raises. Employees might also spend more money than pre-raise levels and end up getting into debt using money or credit they haven’t earned yet.

As of February 2022, the overall rate of inflation is 8.5%

You knew we would bring this up. The inflation rate is the average rise in prices and is a natural outcome when the economy grows faster than the supply of goods and services. Over time, the purchasing power of salaries declines due to inflation.

Inflation is measured by changes in the CPI (Consumer Price Index). The CPI considers changes in price for things like food, housing, transportation costs, medical care, clothing, recreation, and education. So, if you were to buy the same things this year compared to last year, prices would be roughly 8.5% higher.

Every industry has a different rate of inflation

It helps if you’re on top of what’s happening in your specific niche. It can significantly impact how much you should increase salaries. If for example, your industry has an average annual salary increase of 3% for entry-level positions and 5% for mid-career roles, you should either try to match or beat those numbers.

Even if your company suffers from poor performance or reduced demand for its products or services, don’t make your employees suffer. Everyone is feeling the pinch and no one more so than your employees.

Your employees won’t be able to buy as much in 6 months

In 2022, a survey of U.S. companies found employers granted an overall average salary increase of 3.4% since 2021. This is less than half the current inflation rate. Despite a substantial increase from the mean 2021 salary increase of 2.8%, there is a 21% difference.

Inflation should always be accounted for when raising salaries because it changes over time and varies across industries and regions.

Inflation should always be accounted for when raising salaries because it changes over time and varies across industries and regions. California has much higher rates than Alabama. Salary increases may also be necessary when considering where your employees live or what type of lifestyle they want for themselves and their families.

The purchasing power of workers’ salaries will decrease. Therefore, if your employees’ salaries remain fixed while prices continue to rise, employees will be buying less with each paycheck. This is why most companies give raises every year — to keep up with inflation so that workers can maintain their standard of living despite rising costs in housing, gas, and food.

Not factoring inflation into employee compensation?

Ideally, every year your company should provide better compensation to combat inflation. If you don’t offer a yearly increase, employees will consider leaving because they will feel undervalued. If another company provides similar positions that keep up with inflation, those positions will be worth more.

Expect that your company will be perceived as unfair if inflation doesn’t factor into your compensation and salary increases. Wages will lag behind the cost of living over time and turnover issues will follow.

As your employees feel their standard of living decreases they may eventually decide it’s time to find another job. It’s hard to find someone who wants to work hard when they know they won’t see any sort of reward down the road (or worse yet, when their salary goes down).

What if you can’t afford raises for your employees?

Telling you to raise your wages is easy. Doing that, on the other hand, is a lot more challenging. So what can you do if you don’t have the budget to give employees more money?

Bonuses can uplift morale and show appreciation when raises or promotions are not financially feasible. If bonuses are off the table, consider other gifts or rewards to demonstrate recognition like gift certificates, lunches, gym memberships, a health account, and even training.

Some employees might be thrilled to be able to take a course or earn a certification. Foster development among employees, and let them know you value their personal and professional development. You don’t have much of a choice if raises or other monetary perks are beyond your budget.

No best answer when it comes to salary increases

There is no 1 definitive answer to the question of how much to raise employees’ salaries, but there are some factors to consider when making this decision.

The right amount will depend on your budget, the state of the economy, the industry average salary, and other benefits you offer. And while salary increases can help to improve employee morale and productivity, most important is that employees feel appreciated and are paid what they are worth. Ultimately, though, it is up to you to decide what is best for your employees.