How to Adjust Salary for Inflation

September 26, 2023
How to Adjust Salary for Inflation

Here's what you need to know:

  • Employees feel appreciated and respected when their salaries are increased
  • Salaries also provide financial security, which can boost employee morale and productivity
  • To decide how much you need to raise your salaries, understand the rate of inflation in general and in your industry
  • Know your business goals and what competitors are paying for similar positions
  • Understand the value proposition of your company and be able to tell workers why they should work for you instead of your competition

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.

As inflation soars, many businesses tend to plan annual payroll increases of four percent or more. Unfortunately, these planned salary increases may still continue to lag behind inflation. Yet with a rise in inflation come employee expectations of wage increases.

So, should raises match inflation? And if not, in terms of inflation rate vs. salary increase, just how much should you raise your salaries if you can? Deciding how to adjust salaries for inflation will likely boil down to a number of key factors. Here we’ll explore what to consider.

How much to raise salaries varies by industry

Every industry accommodates the need for pay raises differently. Likewise, determining exactly how much of a raise to keep up with inflation will have its variables. However, there are common themes that any industry can heed within or outside the context of salary inflation adjustment.

  • 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 recent salary trends. 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 provided by companies like TriNet to compare real-world salaries to better understand your company’s wages. Data pertaining to 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 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.

Should you offer a raise to keep up with inflation?

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

The pros of raising employees’ salaries

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. So the question flips from should employers match inflation to why wouldn’t they try their best?

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-percent 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.

How does the current inflation rate impact you?

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 in a year of 8.5-percent rate of inflation as you bought the year before, prices would be roughly 8.5 percent 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 three percent for entry-level positions and five percent 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 perhaps no one more so than your employees.

Your employees may not be able to buy as much in six months

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

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 may 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 single 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 how to enhance the employee experience.

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