February 2022 Newsletter: Compensation is Rising – 7 Contributing Factors

It is hard to believe that we have been talking about the war for talent for the last 20 years. We had a reprieve in demand for talent during the great recession. Companies were of course hiring less and often cutting their workforce between 2008-2011 and many workers delayed their retirement due to losing part of their nest egg in the financial markets. Since 2012, we have seen the war for talent crescendo back to a fever pitch. The pandemic has been a huge disruption in labor markets with companies closing, employees being laid-off, or seeing their pay reduced. We entered 2021 with companies starting the year hesitant to increase compensation due to continued uncertainty.

In March of 2021 we saw the retention challenges ahead, as outlined in our March 2021 newsletter titled: “The Tsunami is Coming”.

Despite challenges retaining employees, pay increased only 2.6% in 2021. Most of these increases came between August and December of 2021 when wages increased 10%. (Source: Indeed analysis of Bureau of Labor Statistics data).

Flash forward to February of 2022. The pandemic cloud is lifting, and businesses are more durable and expecting improved conditions ahead. Professionals and executives will see their pay rising over the next 18 months. Let’s look at seven factors impacting pay increases for professionals:

1.The Great Resignation, and what will likely be labeled, “The Great Retirement,” is likely to continue into next year. Financial markets have remained strong enabling many to retire. Regardless of whether retirement or people just quitting jobs…supply goes down and prices go up.

2. Inflation (currently at 7.5%), increased childcare costs, energy costs and continued pandemic disruption is decreasing real income for most households.

3. Individuals changing jobs are seeing wages increase at a higher rate than inflation. Companies are feeling the pressure to raise pay as a pre-emptive strategy to retain their people. Many companies are also reactively increasing pay due to being forced to make counter offers to retain people trying to leave.

4. Surveys can be helpful, but they are a snapshot of the previous year data. They can benchmark comparable averages in work force pay but if you are using them to determine an offer or starting salary for outside talent then you likely need to look at the 60-75th percentile within the category to be competitive. Most people are being hired well above the survey mid points currently.

5. Large companies are driving pay increases. Companies over 1,000 employees are averaging 8% in salary increases. Engineering pay is up 18% on average. If you are a smaller company but competing for the same talent, you have to find a way to be competitive.

6. Private equity is driving pay up within the middle market. PE/VC firms typically paying 10-20 percent higher base salaries and often the short-term incentives are much higher. Often the tradeoff to work for a private or family-owned business is stability and an employee centric culture. Private equity and larger companies are indeed increasing pay pressure for family-owned companies. Along with higher base salaries, PE firms and public companies are offering equity or stock for executives. With 1.3 trillion in PE/VC money sitting on the sideline more companies will be owned by private equity in the future.

7. Hiring slowed and even stopped during the great recession years. We are now experiencing a lower supply of professional Controllers, HR Professionals, Engineers, etc. who would otherwise have been hired during that period. In many cases we are seeing pay for these individuals rise from $100k to $125K (or more) seemingly overnight.

Wondering What You Can Do?

You will likely need to pay more as a retention strategy 2022. Traditional compensation approaches will likely need to take a back seat to being creative and selectively aggressive in pay increases to keep your best people.

Consider incentives that tie increases in pay to improved performance/ results. Increasing salaries selectively can create equity issues and ruffle feathers. This will require managers and HR departments to understand and be capable of navigating these touchy conversations.

Create an attractive culture, be flexible, keep your teams challenged and help them develop in their career. This also helps build loyalty and retain talent.

Be proactive with pay increases. You will likely pay much more if you are reacting with a counter-offer to keep someone.

Executive pay is also on the rise. We see significant differences in what PE firms are paying a middle market C-suite executive compared to family-owned counterparts. This gap will likely narrow over time, but PE firms are not decreasing pay. Pressure will increase to get executives who work outside of public and PE-environments paid more competitively, or risk losing them to a growing PE-owned segment of the economy.

Look for compensation to be a continued topic of conversation!