Written by contributing writer Rameez Kaleem, Founder & Managing Director, 3R Strategy 

With the cost of living crisis having a huge impact on the lives of many across the country, there has been a lot of discussion about pay rises matching the inflation rate. 

Inflation has been pretty low for a long time, with the average annual inflation rate between 2018-2021 being 2%. In the last year, it has skyrocketed to 11%. This has a distinct impact on not only how far an employee’s salary will go but also on the business and its operational costs. 

Companies have historically been justifying low pay budgets by low inflation numbers – but does this make sense? To ensure that pay is fair and appropriate, organizations must address key issues in the pay decision-making process. 

1. The problem of choice

Inflation is measured in different ways. For example, The Consumer Prices Index (CPI) is the standard method in Europe. The Retail Price Index (RPI) is usually used in the UK, and the Consumer Prices Index, including owner-occupiers’ housing costs (CPIH), is considered to be the most comprehensive. 

The problem with the range of choice is that many organizations will choose whichever number fits the narrative which best suits them and will then have the data to back it up. However, after years of low inflation justifying low pay increases, many employees now feel that it is time they are compensated, although most organizations can not realistically provide 11% pay rises. 

To establish fair pay, organizations mustn’t align pay decisions with whichever numbers fit their narrative, and other factors must be taken into account. A standardized process across industries will help organizations and employees benchmark their salaries more effectively.

2. Inflation alone does not ensure appropriate pay

Inflation alone can’t justify pay decisions. Instead, leaders must begin by considering whether their employees are earning the right salaries in the first place. 

If salaries are too low, they should receive more than an inflationary increase. And if they are too high, then an increase is not necessary at all. Relying solely on inflation as a basis for pay increases doesn’t solve the problem of existing inequalities. 

Imagine you have one skinny cat and one fat cat, and you feed both of them one sardine a day. The skinny cat probably needs more, while the fat cat was well-fed already. Basing pay rises on inflation alone is similar. 

A better alternative is to invest in robust salary benchmarking to ensure salaries are aligned with the external market. How is inflation relevant if our starting salaries are already wrong? 

3. Define pay decisions clearly

Leaders also need to think more broadly about how and why they are making pay decisions. How clearly is this mapped out, and do employees have a good understanding of this? Clear definitions that are actively communicated to everyone in an organization ensure that everyone understands the process and knows that it is fair.  

When people feel in the dark about how and why pay decisions are being made, they begin to create their own assumptions, which can have a negative impact on morale and engagement. Once leadership has clearly defined pay decisions, sharing them is key so that nobody has any false preconceptions. A clear and fair pay process must be communicated appropriately to employees so that a culture of trust is built. 

Developing clear reward principles and communicating salary decisions, as well as desired behaviors to employees will help everyone, including leadership, understand in detail the how and the why of pay decisions. Clear definitions and transparency about salary-making decisions will help build better trust and engagement in addition to ensuring that pay is fair. 

In closing, salary budgeting decisions and deciding on pay rises is a complex process that needs to take into account various factors to ensure that pay is fair and appropriate. Basing pay on inflation alone is too one-dimensional and neglects other key factors. To ensure pay is fair, leaders must assess whether their salaries are accurate or fair, to begin with.   

About the Author:

Rameez Kaleem is the founder and managing director at reward consultancy 3R Strategy and the author of A Case of the Mondays. With his team at 3R Strategy, he helps businesses build a culture of trust through pay transparency.