7 tips for HR: How to handle wage pressure and ensure employee engagement when inflation is on the rise

Author - Morten Henriksen. Executive Officer

We have all felt it. Inflation is soaring, and many things have increased in price. This makes it harder for many of us to make ends meet, and many employees expect an immediate and corresponding increase in wages. What can HR do to ensure engaged employees when inflation rises and wages are under pressure?

wages become more important for employees 

When a situation arises where the development in living costs is greater than the development in wages, it leads to a decline in real wages. This is a situation that many people find hard to accept, and therefore, many expect an adjustment in pay that fully or partially offsets the decline in real wages.

Employees want fairness

From Ennova’s ongoing monitoring of employee surveys across companies and for many years, we see that, prior to 2022, wages had a very limited effect on perceived employee engagement.

Now the situation has flipped, and we see an increasing effect directly due to the assessment of the pay. The increasing importance of wages is most often seen when employees experience a lack of fairness in wage determination and development. It could be in relation to the market level for their position, but it could also be in relation to the effort or additional responsibility that the employee has undertaken at their job.

Some employees might consider changing jobs

The expectations concerning increasing wages are also influenced by a labor market which lacks employees in some areas, thus leading to competition for the right competences. Therefore, many salaried employees find it relatively easy to change jobs, thus safely fulfilling their desire for an increase in wages. Changing jobs would be the right solution for some, but not for all. Here, it is important that employees consider and ask themselves: Are wages very important for my motivation? Or am I experiencing an unfair balance between competence/effort and wage/recognition? If the answer is yes, then it is probably the right time to change job.

On the other hand, if you like your work, if it is interesting and helps you develop, and if you have good colleagues and partners, then you should probably give it a second thought.

why don't employers simply compensate for the decline in real wages? 

It is difficult for employers to compensate for the decline in real wages, even though they are facing a big dilemma due to the struggle for resources/competences.

First of all, companies have social responsibility, and if they simply raise wages in line with inflation, this will initiate a negative cycle that will lead to further inflation since companies will be forced to pass on their increasing costs to their customers.

Secondly, companies are also experiencing uncertainty due to increasing prices of raw materials, a lack of raw materials, lower consumer trust, volatile stocks, increasing interest, etc. This means that most companies are not willing to change their wage levels significantly.

Finally, employers can argue against that wage development should follow inflation since, for a number of years, the development in wages has been significantly higher than the development in consumer prices. Therefore, real wages have actually been on the rise for a number of years. What we are now seeing is an adjustment.

 

7 tips for hr when inflation is high 

It is necessary for HR to actively be involved in the handling of these expectations for higher wages, which include the following:

1. Clear policies and processes for wage determination

A transparent and clear process can help employees better understand how performance/effort is assessed and which context there is for determination of wages and development. In many companies, this is not clear to the employees (nor always to the leaders), but in the current situation it becomes important.

2. Updated wage statistics

HR must ensure access to updated wage statistics data that ensures that HR and leaders can argue that the wage matches the conditions in the market for the individual employee. Use salary bands to update levels on an ongoing basis, and take proactive action if key employees drop outside the band.

3. Be open to re-thinking the compensation strategy

Are the employees that produce the most value for the company and team the ones that are favored in the current compensation approach? If not, then be open to adjusting the approach because right now you are facing a big risk of losing the employees that are heavily involved in value creation.

4. Create a focused adjustment of wages

Together with the leaders, HR should identify key employees that might not be at the correct wage level and may therefore be in danger of switching jobs. In particular, key employees that have been loyal for a number of years can reap significant benefits by switching company and can no longer defend the wage difference that may exist between their current job and a new job (“loyalty tax”). The concept of “loyalty tax” covers the fact that employees that do not change jobs every 3-5 years risk being left behind in relation to the overall wage level over the course of their careers.

5. Respect the concerns of the employees

Empathy is critical in a time when changes are taking place – particularly if these involve the employee’s financial situation and concerns. Leaders, HR and top management have generally done an exemplary job of showing empathy during COVID-19. Now you have to call upon some of the same skills, only this time it involves financial security rather than health safety.

6. Support leaders to enter into dialogs on wages in the team

The leader has an important task of explaining and translating messages from HR and top management concerning wage levels and development. Leaders must be ready to enter into a dialog on the significance of wages for engagement – both in the team and with the individual employee. The leader must recognize that the wages can have a significant impact on engagement and that, for some, it is so significant that they switch jobs. The leaders must shift their focus towards providing examples of all the things that are now driving engagement at work to a greater degree, so that this is visible to the employee.

7. Strengthen recognition of effort and connection to the team

The leader must be close to the employees in the team and be fully focused on recognition, both in the employee-leader relationship but also mutually between team members. Establish a common understanding that there are certain external circumstances affecting the frameworks for teamwork, and make it clear that if we help one another we will get through the situation safely. The perceived connection to the team and close colleagues is an important barrier to avoid employee turnover.

 

important to keep your finger on the pulse 

Right now, there is great risk that you will lose some of the employees that are most important to the company or the team. Therefore, it is critical that leaders remain close to the employees. That leaders take responsibility and listen to an even greater degree and, at times, enter into difficult dialogs concerning the drivers of employee motivation and engagement and how the situation can be improved.

HR must make sure that these dialogs are supported at all levels of the organization by a data-driven foundation, so that the leaders can always tap into what is most important for the team’s/unit’s motivation and engagement. HR must also ensure that leaders receive general feedback from exit surveys and interviews, so that they can consider whether their focus and communication require adjustment.

Morten Henriksen. Executive Officer
Author

Morten Henriksen. Executive Officer

Morten Henriksen is Executive Officer and responsible for Ennovas Employee Experience area. He has 20 years of experience as a consultant for some of the largest companies in Scandinavia. He is passionate about putting data driven insights into action and securing connection to business strategies through a people first mindset.