Wages and Benefits Are Rising—So Is CEO Anxiety

Employment costs are growing at the fastest rate in years—a great trend for workers, but their leaders have a quandary.

It’s seemingly great news: American wages and benefits are growing at the fastest levels in years. But while US workers are cheering, the speed of that growth is forcing some leaders to face some difficult questions about employment costs. 

New government data showed that the costs of US salaries and benefits surged in the first three months of 2018. Wages grew at an annualized 2.7% clip in the first three months of 2018, the fastest increase in a decade. Meanwhile, the cost of benefits jumped at a 2.6% annualized pace, the quickest since 2015. But many executives remember that it wasn’t even a decade ago that they were doing everything to make sure their company survived following the financial crisis, says Bob Wesselkamper, global leader of Rewards and Benefits Solutions for Korn Ferry. “They are still acutely aware that raising your cost base isn’t wise,” he says.  

For that reason, he says companies will be judicious in the way that they dole out raises, wanting to target the most in-demand workers or those with hot skills. “It won’t be a peanut butter approach with everyone getting the same,” he says. “How do you recognize those who have the critical skills versus those who are new to the workforce?” It will be different.

To complicate matters, many organizations are trying to make sure their male and female employees are paid equally. Media and social pressure, along with new regulations, are convincing companies to address the gap by increasing women’s pay, says Tom McMullen, senior client partner in Korn Ferry’s North American Total Rewards practice. “You never reduce someone’s pay; you just increase the pay of the lower paid,” he says. That, of course, adds another cost on top of the raises that get doled out anyway.

One thing that managers can do to mitigate a wholesale increase in the fixed costs of employing people is to consider giving “premiums,” says Ben Frost, Korn Ferry’s general manager of Reward Products. “There’s a lot of merit in jobs having a specific rate of pay, but that position might receive a temporary market premium payment,” he says. For instance, if there were a temporary shortage of telecom engineers, then the engineers would get the extra premium payment until the supply of experienced workers increases. 

Frost also warns managers against expecting that they can reduce costs by workers quitting on their own. Workers most often don’t resign when it’s most effective for the organization, such as during a recession, Frost says. Typically, when the economy slows so do worker quit rates. Voluntary buyouts can also backfire, since the people who take them often are valuable employees. “The people who take voluntary redundancy are probably the exact people you don’t want to leave,” he says. That’s a problem that would make the stress of managing a company during an economic downturn even worse.