Planning Compensation Changes for 2020

As we near the end of 2019, many businesses are thinking about budgets and annual reviews. A discussion around compensation is a critical component of any review, and it addresses an important downstream cost driver. In every company, leaders are challenged with balancing the desire to reward their employees’ hard work with the eventual cost impact to their bottom line. To help you navigate these important decisions – and for some perspective on how your employees may be feeling financially – here are some tangible data points on the personal impact of pricing changes and on the latest wage trends:

The US Consumer Price Index (Prices) is a common barometer for the pricing environment, and we use the month-over-month growth rates as a gauge of current inflationary trends. As of October, Prices were up a relatively mild 1.8% over October 2018.

However, price changes in specific categories are quite different, sometimes dramatically so. The US Consumer Price Index for Medical Care, for example, is up 4.3% as of October 2019, and in a clear Phase B, Accelerating Growth, trend. Keep in mind that this is the largest consumer spending category. Health insurance costs are up 18.8% over the past year, and, though your employees may only face this change one time annually, the pressure on their pocketbooks persists throughout the year.

The CPI for housing, the second-largest spending category, is up a more moderate 2.9% during the same time. It has been oscillating around this level for several years now, but the growth rate is still substantially higher than that of overall Prices.

To put it simply, people feel changes to Prices differently, and oftentimes more acutely, than the measure of overall inflation indicates.

US Average Hourly Earnings for the Total Private Workforce are currently up 3.2% on a year-over-year basis. This may tempt you to target 3% as the average salary adjustment for your employees. However, keep the above-discussed spending and inflation data in mind. Furthermore, don’t forget about the tight job market! Make sure you are having open, candid, and empathetic conversations with your employees, both in their annual reviews and on an ongoing basis throughout the year. This will help you retain your key performers while staying focused on your bottom line.