4 ways employers should rethink compensation in the current market

Inflation woes have led headlines throughout 2022, putting employers in a tough position.

“You can’t go anywhere or turn the TV on without hearing about inflation,” Larry Vasquez, head of equities at Mercer, said during the company’s webinar on compensation considerations in the current market.

While concerns about the economy abound — including the potential for recession — Mercer experts said that most indicators still paint a positive picture for employers. A slowdown in hiring and rising unemployment claims typically precede recessions, but neither indicator has appeared through March, Vasquez said. 

Regardless, inflation remains a real pressure on workers. What can — and should — employers do in this situation?

Here are four conference takeaways for employers considering compensation plan adjustments.

COVID-19 led to greater volatility month to month for healthcare claims, and inflation has made the entire calculation more difficult for employers, Sunit Patel, chief actuary at Mercer, explained. Yearly healthcare cost increases are part and parcel of sponsoring a health plan, but two-thirds of CFOs surveyed by Mercer said costs must trend at the consumer price index or below in order for such increases to remain sustainable. Patel said that will likely be true this year — but not in a good way.



“We’re likely to see CPI exceed health inflation for the first time in many years,” Patel said. “This is not going to be viewed as a victory by anyone … due to a CPI in high single digits.” 

It will take time for inflation to be truly seen in the claims data, Patel continued, which may lead to “wide and unpredictable” cost outcomes overall. To combat this, employers may need to reforecast claims cost multiple times. Of CFOs surveyed, most reforecasted claims at least twice for the current plan year, with one-fifth doing so at least four times.

Compensation has risen at speeds not seen since 2008, Andre Rooks, partner and career business leader at Mercer, said. Actual compensation increases for 2022 came in above November projections, “indicating the fast-moving nature of compensation” right now.

Two dynamics are at play, Rooks said. For one, the tightness of the labor market has prompted employers to make “reactive changes” to compensation on the off cycle, pushing salaries up at unusual times, especially for job titles most in need of hires.

The other dynamic features the all-time high turnover that has plagued organizations, Rooks said. As companies hire to make up for losses, those new hires come in at “premium pay positions” compared to those who left, driving up compensation overall. Retail has been particularly hit by this shift, compelled by large increases in minimum wage made to try and retain talent, Rooks said.

The million dollar question: Should inflation be a factor in compensation strategy? It’s “tricky,” Rooks said.

Typically, no. Employers usually focus on overall market movement based on supply and demand for talent, Rooks said, and comp increases have remained relatively consistent despite a few outliers.

“We see a lot of bad press” about wages not meeting inflation, he continued, but the current approach taken by employers has led to larger increases in wages than if they were indexed to CPI, he said. Globally, employers have been wrangling with inflation for some time, and it is usually not an issue unless it becomes a “sustained part of the economy, such as in Argentina or Turkey.”



Instead, employers are relying on bonuses and incentives to keep budgets manageable and talent engaged.

In absence of an explanation for how their pay is determined, employees are quick to assume they are underpaid, the Mercer execs noted. Pay calculations are largely kept a black box — but that may be harder to sell in the current market.



In response, employers should examine ways to increase transparency in how pay is set, especially in comparison to the broader market.