Search
Close this search box.
Search
Close this search box.

The Compensation Race Is On—And Anyone Could Win (Or Lose)

© AdobeStock
Employers are in a bind: without employees, it’s impossible for businesses to grow, yet attracting and retaining new talent requires higher-than-ever wages. A closer look.

Unwelcome and unexplained specters seem to lurk everywhere these days. The Covid-19 pandemic, while ostensibly on the wane in nations with easy access to vaccines, continues to sow volatility and uncertainty in people’s lives and the markets, and the new Delta variant has many worried about another winter of isolation. Meanwhile, businesses large and small continue to post physical and digital “help wanted” signs without results. From investment bankers to dishwashers, there suddenly seems to be a dearth of talent. A grim spectator might conclude that a labor shortage could be related to the death of more than half a million Americans. It’s not that simple.

Somehow, unemployment remains elevated even as there are a record number of job postings. Depending on what data set you look at, wages are either basically flat compared to pre-pandemic days, or surging. Credit remains cheap, but for how long? At major corporations, wage pressures combined with these uncertainties are a bitter pill. So much so that executives don’t even want to talk about the possibility of wage inflation, at least not publicly. Like the Babadook or Bloody Mary, there’s a pervasive fear that if companies and CHROs talk about wage inflation, it might just appear, lurking in the corner and growing ever more pervasive. And if it does, it may be hard to dispel.

What’s Really Going On?

The general consensus in the business community is that wage inflation is real, but—as usual—it depends on how one parses the data. Recent research from Pew, for instance, found that the median U.S. wage rose during the Covid-19 recession in 2020 as a result of lower-wage workers leaving the workforce, but began dropping by the second quarter of 2021 as those workers returned to their jobs and inflation ticked up. By this measure, then, wage inflation would seemingly be a myth. Yet when the recently unemployed are factored out, wage inflation snaps into focus, with the median hourly wage of the bottom 20 percent of workers up almost 8 percent for the second quarter of 2021 compared to the same quarter in 2019 and 4 percent for the top 20 percent in the same period.

Indeed, data from the U.S. Bureau of Labor Statistics indicates that private industry wages and salaries in the second quarter had risen 3.5 percent year-over-year, with a full percent surge in the second quarter alone. Clearly, for those in the U.S. workforce, wages are rising rapidly. This puts employers in a bind, given that there are more open positions than there are people actively looking for a job. Without employees, it’s impossible for businesses to grow, yet attracting and retaining new talent requires higher wages. Put simply, the law of supply and demand, under these conditions, drives wages higher.

“Month after month there are a record number of job openings,” says macroeconomist and president of Sri-Kumar Global Strategies Dr. Komal Sri-Kumar.

The Bureau of Labor Statistics’ most recent report indicated that there were 10.9 million job openings in the U.S. as of the end of July, yet the number of unemployed individuals in the U.S. continues to hover around 8.4 million. It might be reasonable to assume that in such an environment, with wages rising, unemployment would be dropping, yet there are several factors continuing to roil the labor market. One, according to Sri-Kumar, is high rates of skill mismatches. There are lots of people looking for jobs, and lots of companies seeking employees, but they have the wrong skill sets, at least within the markets where they are looking. This is particularly evident when looking at the elevated “quits” rate, literally the rate at which people leave a job and look for another one because they have high-demand skills. From January 2010 to January 2020, the average quits rate in the U.S. floated around between 1.3 percent and 2.4 percent. In July 2021, the quits rate was 2.7 percent.

Further exacerbating hiring efforts, and driving wages still higher, are worker fears over the Delta variant of the coronavirus and, particularly for lower-wage retail and restaurant workers, childcare pressures due to school disruptions. Still more workers “want to stay home with their children because they don’t want to leave them with a caregiver who might not be vaccinated,” Sri-Kumar says. These factors led to a labor force participation rate of just 61.7 percent in August 2021 compared to 63.3 percent in February 2020. Compounding matters further for companies, various government benefits, although providing a vital safety net for those thrown out of work by the pandemic, have also given them greater flexibility in returning to those jobs.

Sri-Kumar argues that companies can sustain rising wages for the moment, thanks to continued low interest rates and high profits. Yet a possible move by the Federal Reserve to begin raising interest rates in 2022 could constrain this. At the same time, inflation is coming into play. “Once prices start going up, and your workers find out that they are losing purchasing power, they will ask for more money,” Sri-Kumar says. “They call it a wage price spiral, and if the Fed is not going to support it and is going to apply the brakes, then you have to forecast a severe recession.”

The Compensation Omerta

It’s pretty easy to find examples of major companies increasing compensation. Walmart, for instance, announced in September that it would suspend quarterly bonuses beginning in January 2022 as it moved to boost hourly wages for store workers, increasing its minimum to $12 per hour. The average pay for Walmart’s 565,000 store workers is $16.40, and major competitors Target and Amazon have boosted their base pay to $15 per hour. McDonald’s likewise is boosting base pay, announcing a plan in July to reach $15 per hour by 2024 at all company owned locations. And Apple plans to issue rare bonuses as high as $1,000 to store employees in October. The tech giant even intends to pay $200 bonuses to holiday workers.

On Wall Street, salaries are surging during an arms race between investment banks. While first-year bankers at Goldman Sachs, Morgan Stanley, Citigroup, Bank of America and JPMorgan were all paid $85,000 per year at the beginning of summer 2021, by the end of September they were all paid $100,000 and Lazard announced $50,000 increases, meaning a first-year associate at the investment bank is pulling down $200,000 per year.

Yet with major corporations across industries boosting pay at such a blistering pace, there is remarkably little chatter about the trend, at least in public. For CHROs, it could easily feel that they adrift, making moves without a clear sense of what their peers (and competitors) are doing. There are systemic reasons why—even though everyone knows wages are rising—no one in the C-Suite wants to talk about comp. If CHROs “start saying that wages are in fact increasing, then they are saying to competitors in the same industry that they are facing cost pressures, and you do not want to reveal that competitive information if you can hold onto it,” Sri-Kumar says. Added to that, “to the extent your employees realize that this significant wage increase is taking place, the question then is, why am I being left behind?”

Discussing wage inflation, even though it is a significant pressure on businesses large and small right now, is seen almost as a self-fulfilling prophecy within executive suites, notes marketing and technology consultant Tim Parkin. There’s a sense “that if you talk about wage inflation, employees or executives will want a bigger piece of the pie,” Parkin says. And, of course, the competition is watching. “In a game of poker, you don’t want to be the only one to reveal your hand,” Parkin says. In terms of discussing compensation trends, “It’s a game of chicken about who can say the most by saying the least.” There’s a fear that if a company comes out and says it pays the most for a certain type of job, a competitor will seek to one-up them, creating a vicious cycle of wage increases.

Yet Parkin contends that this tendency to conceal trends around compensation may be self-defeating. While people used to primarily think about compensation in financial terms, and that certainly remains a factor, many employees now want different things. “Culture beats compensation any day of the week, even at the executive level,” Parkin says. Particularly post-Covid, employees and executives want autonomy and flexibility, and while “companies feel like if their compensation is not the highest, they can be beaten by competitors,” the reality today is that compensation “is a total package.”

To win and retain employees, employers should be talking about what they offer in terms of remote work, flexibility and benefits. And in some cases, Parkin argues, they should even talk about money. He cites one of his clients, a regional hospital, which has struggled to hire nurses because there are not enough in the area. Instead, “They’re creating a marketing campaign to access nursing students who are about to graduate in 25 different markets” and offering to relocate them at higher pay than in the regions where they are going to school. “The pay is a little better, but it’s for the worst shift,” Parkin adds.

Where Does It End?

Wages may continue to spiral for the foreseeable future. Even in the event of an economic downturn as a result of Fed action, wages likely won’t fall. (As Parkin notes, “You can’t hire someone and pay them 40 percent less than their peers.”) Companies will still need to hire, and once wages have risen, it is virtually impossible to lower them. Instead, they will have to get creative. For one thing, C-Suites need to be nimble in terms of how they’re allocating resources, says Tim Ceci, a consultant for companies ranging from Nike to Nordstrom to Celine/LVMH and head of U.S. operations for retail tech company QVALON. That means paying close attention to individual markets and understanding where they are short staffed or—potentially—have too many locations open. “In some cases, you may have 28 stores, but you may keep six closed for now because the wages are just too expensive, and you don’t have the scheduling bandwidth to do it. So instead, you can concentrate your resources on the other 22,” Ceci says.

Executives also need to pay attention to their data and look for places where technology can help make their employees more efficient. More than anything, executives need to “get close, get out of the elevator, get on the ground and get with their folks,” Ceci says. “Get on the shop floor because you end up seeing and learning so much, both from your teams in terms of what they need to succeed, as well as being near your customer.”

There are limits, however, to how much technology and efficiency can make up for rising wages. The number one thing companies and CHROs can do is look at ways to reallocate dollars from real estate and office space to wages. “You can’t provide lunch and Ping-Pong tables when people are remote,” Parkin says. “Companies will finally fold on office space and take that expenditure and shift it to employees.” Even industries like hospitality may begin to reduce their real estate footprints in markets like New York City. “Some of these giants like Sheraton and Marriott can’t fill two towers,” Ceci says. “Maybe they’ll keep one open for customers and then start to consolidate some corporate functions or the things that they moved to Jersey City.” Divesting from properties that only a fraction of employees is using and “compensating employees better,” Parkin argues, will be a better investment in the long run.

In other words, decisions CHROs are making about compensation behind closed doors today will shape the physical reality of companies and work for years to come.


MORE LIKE THIS

  • Get the CEO Briefing

    Sign up today to get weekly access to the latest issues affecting CEOs in every industry
  • upcoming events

    Roundtable

    Strategic Planning Workshop

    1:00 - 5:00 pm

    Over 70% of Executives Surveyed Agree: Many Strategic Planning Efforts Lack Systematic Approach Tips for Enhancing Your Strategic Planning Process

    Executives expressed frustration with their current strategic planning process. Issues include:

    1. Lack of systematic approach (70%)
    2. Laundry lists without prioritization (68%)
    3. Decisions based on personalities rather than facts and information (65%)

     

    Steve Rutan and Denise Harrison have put together an afternoon workshop that will provide the tools you need to address these concerns.  They have worked with hundreds of executives to develop a systematic approach that will enable your team to make better decisions during strategic planning.  Steve and Denise will walk you through exercises for prioritizing your lists and steps that will reset and reinvigorate your process.  This will be a hands-on workshop that will enable you to think about your business as you use the tools that are being presented.  If you are ready for a Strategic Planning tune-up, select this workshop in your registration form.  The additional fee of $695 will be added to your total.

    To sign up, select this option in your registration form. Additional fee of $695 will be added to your total.

    New York, NY: ​​​Chief Executive's Corporate Citizenship Awards 2017

    Women in Leadership Seminar and Peer Discussion

    2:00 - 5:00 pm

    Female leaders face the same issues all leaders do, but they often face additional challenges too. In this peer session, we will facilitate a discussion of best practices and how to overcome common barriers to help women leaders be more effective within and outside their organizations. 

    Limited space available.

    To sign up, select this option in your registration form. Additional fee of $495 will be added to your total.

    Golf Outing

    10:30 - 5:00 pm
    General’s Retreat at Hermitage Golf Course
    Sponsored by UBS

    General’s Retreat, built in 1986 with architect Gary Roger Baird, has been voted the “Best Golf Course in Nashville” and is a “must play” when visiting the Nashville, Tennessee area. With the beautiful setting along the Cumberland River, golfers of all capabilities will thoroughly enjoy the golf, scenery and hospitality.

    The golf outing fee includes transportation to and from the hotel, greens/cart fees, use of practice facilities, and boxed lunch. The bus will leave the hotel at 10:30 am for a noon shotgun start and return to the hotel after the cocktail reception following the completion of the round.

    To sign up, select this option in your registration form. Additional fee of $295 will be added to your total.