Employers Face New Challenges as Wages Rise

2017 Compensation Trends

Overland Park, KS (July 18, 2017) – After a prolonged period of stagnant growth, wages are beginning to rise again in the labor market.

The Bureau of Labor Statistics (BLS) recently reported that the average hourly wage rose $0.10 in December 2016 and 2.9% year-over-year which is the largest increase since 2009. In addition, OMNI Human Resource Management (OMNI) has observed that overall pay in the labor market has been growing 2% – 3% annually depending on the type of job or function being performed. Even more, wages appear to be rising as unemployment is dropping and many labor markets or geographic regions approach full employment. However, wage growth still appears to lag the overall economic recovery, and forecasters still project slow wage growth for the foreseeable future.

Slow Recovery

But even with average hourly earnings rising from 1.7% in 2014 to 2.9% at the end of 2016, critics argue that wages are still below par. With an inflation goal of 2% and productivity growth of 1.5%, experts suggest that average wages should be rising by 3.5% annually. Economists also say that inflation adjusted wage growth is still not where we saw it in the 1990’s and early 2000’s, and we have years of slow wage growth now to make up for. Experts also say that automation and globalization are key factors that have held wage growth down longer than in previous recessionary cycles.

Strong Growth Predicted

However, the sea of change may be upon us. Experts are predicting that average wages will continue to increase at a faster rate. They believe that the labor market will continue to tighten and overall inflation will remain relatively modest. Experts also believe that wages are a lagging indicator and that they have not fully reacted to the 2016 labor market. As such, workers in the highest demand fields – engineering, high tech, healthcare – will benefit the most from increased wages at a faster rate than others.

Employers Must Adapt

So, what can we conclude from these trends and indications? First, rising wages and full employment will make it harder for employers to retain and attract strong talent, increasing pressure on their bottom line. This may be even more the case for certain in-demand skills/sectors like technology, engineering, and healthcare.

Second, pressure on annual merit or general pay increases is mounting, again bringing increased pressure on the bottom line.

Therefore, employers must begin to adapt. At OMNI, we are encouraging our clients to consider raising compensation for consistent high performers and critical skilled employees to retain this valuable talent.

We are also encouraging clients to consider incentive compensation payments in lieu of base pay increases. This avoids the compounding growth of base pay increases while still providing valuable reward opportunity for all employees and top performers, particularly if the incentive compensation payments are tied directly to employee performance – higher risk, higher potential reward. This approach works particularly well in environments that embrace high performance and clear employee goals.

We are also encouraging our clients to pay careful attention to non-compensation opportunities to retain and motivate their key talent. These opportunities include:

  • Career development and opportunities for employees to develop new skills or work on special projects
  • Flex-time or remote work opportunities
  • Greater emphasis on total rewards – compensation, benefits, recognition – and adjusting the mix of these elements to address overall employee needs – medical benefits, retirement benefits, etc.
  • Philanthropic and community service opportunities which build teamwork and enhances the company’s overall image in the community

Budget season is almost upon us. The time is now for employers to weigh these opportunities and plan and budget for high leverage tactics that will attract and retain strong talent and deliver high return on their employee compensation investment.

Jon Binder
Senior Consultant & Compensation Practice Leader
OMNI Human Resource Management

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