Retention Bonuses: Companies Offer Big Pay Raises to Keep Employees

Employees who remain in their positions are receiving the most substantial salary increases in many years, which is causing inflation to rise.

In November, wages for employees who remained in their positions increased by 5.5% compared to the same time the previous year, as reported by the Federal Reserve Bank of Atlanta. This was a higher rate of growth than the 3.7% seen in January 2022 and the highest rate of increase in the past 25 years.

Rising wages have been a factor in the historically high inflation seen in the early part of 2022, with some businesses raising prices to cover the additional labor costs. Although inflation has decreased in recent months, it is still at a high level. The Federal Reserve is keeping a close eye on wage growth as they contemplate further interest rate hikes to slow the economy and reduce inflation.

In November, employees who had changed companies, job duties, or occupations experienced an even more significant wage increase of 7.7% from the same time the year before. This potential for employees to leave for higher pay is a major factor in why companies are increasing wages for their current staff.

Despite the overall increase in pay, many employees are not experiencing the same gains. Data from the Labor Department shows that wages for private-sector workers decreased by 1.9% in the 12 months leading up to November, when accounting for the 7.1% annual inflation rate.

Layla O'Kane, senior economist at Lightcast, noted that those employed in leisure and hospitality can discover job openings that may offer higher wages, making it more attractive to change jobs.

She noted that when she sees that the Burger King down the street is offering $22 an hour, and she is making $20 an hour at the Dunkin' Donuts she works at, she knows exactly what her opportunity cost is. Employers are responding to this by raising wages internally to prevent losing trained staff.

As the economy has recovered from the pandemic, employees have gained more leverage in negotiations, likely giving them the confidence to request higher wages from their employers, according to Ms. O'Kane.

Alexandria Carter, a billing specialist and accountant at an insurance company in Baltimore, was recently rewarded for her hard work. After her year-end performance review, she was given a promotion and a 7% pay increase. Her bosses also expressed their plans for her to continue to advance in the company.

This was a stark difference from her prior positions, where recognition and salary increases were not as frequent.

She expressed her delight at the recognition she had received for her work. "It's really nice to be told that I'm doing well in my new role and to be rewarded for the effort I've put in," she said.

It appears that wage increases are starting to slow down as the labor market begins to relax. Average hourly earnings rose 5.1% in November compared to the same time last year, which is a decrease from the 5.6% peak in March. Analysts anticipate that wage growth could continue to decelerate in the upcoming months.

Paul McDonald, senior executive director at Robert Half, a professional staffing company, noted that in industries with high demand for workers, companies are expecting wage growth to keep up with inflation. He added that as inflation decreases, wage growth should become more in line with what it has been.

In November, the consumer-price index, which tracks the cost of goods and services for consumers, rose 7.1% from the same time the year before. This was a decrease from October's 7.7%. Since June's 9.1% high, the rate of price increases has been slowing.

In a competitive job market where employees are often poached, wage pressures are likely to remain. A survey conducted by Robert Half in September revealed that more than half of professionals feel underpaid, and 40% of workers would consider leaving their current job for a 10% raise elsewhere.

Mike Sebazco, the president of Famous Toastery, a breakfast, brunch and lunch chain based in Charlotte, N.C., has announced that the company is increasing wages for kitchen staff members at its eight company-owned locations faster than ever before. The wages are up by approximately 15% from the same time last year.

He stated that they did not want to be an easy target for poaching. It is not unusual for managers from other companies to come to Famous Toastery's dumpster pads and offer their employees an extra $2 an hour to work for them, according to Mr. Sebazco.

In order to account for increased labor expenses, Famous Toastery increased the cost of certain menu items in August, including the Western omelet which is made with ham, roasted peppers, caramelized onions, and American cheese.

According to Mr. Sebazco, prices of bacon, eggs, and other produce items may fluctuate, but it is something that can be managed. He also noted that they have never encountered a situation like this before where labor costs have risen so drastically.

The Boston Federal Reserve district's Beige Book, which is a compilation of business accounts, reported that many businesses in the area are feeling more inflationary pressure from labor costs than other expenses in 2023.

Lauren Mason, senior principal at consulting firm Mercer LLC, reported that most business executives are confident that they can pass wage increases on to consumers through higher prices. She noted that this makes it simpler for them to absorb the costs of compensation investments.

Economists suggest that wage and price increases can be mutually reinforcing. As inflation rises, some employees are asking for cost-of-living increases, which can lead to wage growth for those who remain in their jobs.

In general, wages are increasing for both those who remain in their current job and those who switch to a new one due to the lack of available workers. In October, the number of job openings was 10.3 million, which was much higher than the 6.1 million unemployed individuals searching for employment.

Organizations are utilizing merit-based salary increases to retain their staff and reduce the potential loss of productivity that comes with recruiting and training new personnel. A Mercer survey of over 1,000 companies has revealed that firms are allocating more money for merit-pay increases in 2023 than they have in the past 15 years.

Daniel Powers, a recent college graduate, was hired in September at a management consulting firm in Chicago with a six-figure salary. At the end of the year, he was rewarded with a 10% raise.

Mr. Powers commented that the management of his firm is aware of the competitive nature of the market and does not create a false sense of camaraderie.