Why you need to plan ahead for higher payroll costs in 2022

Wages are growing at an unprecedented rate in the U.S. The November Conference Board Salary Increase Budget Survey predicts a 3.9% jump in wage costs for organizations in 2022, compared to 3% reported in April. This would mark the highest rate since 2008.

So what is the reason behind this increase, and why should you plan for higher payroll costs in 2022? 

According to the survey, 46% of the respondents said that the increase in wages of new hires played a role in salary increase budget estimates for 2022, while 39% said that increased inflation was a factor.

The Conference Board noted, “When more experienced workers feel that their pay advantage is no longer significant, they may seek new jobs in the tight labor market, which leads to high labor turnover of more experienced workers.”

Most employers expect severe labor shortages to continue through 2022. During that period, overall wage growth is expected to remain well above 4%. Wages for new hires in addition to workers in blue-collar and manual services jobs will grow faster than average, too.

Also, there are no signs of inflation slowing down. Inflation may remain elevated in the coming months, thereby increasing the need for cost-of-living adjustment.

This upward momentum for wage increase budgets is likely to continue into early 2022, and so, salary increase budgets may be adjusted to the higher side in the coming months as more businesses adjust their policies to account for the acceleration in wages and inflation.

A tighter U.S. labor market plays a big role

Employers are finding it tough to find people. A surge in demand for employees combined with a stagnant labor supply has led to significant difficulties in attracting and retaining talent in recent months. 

To tackle that, American businesses are planning to give staff members larger raises in 2022 “as they recover from the economic fallout from the pandemic and face mounting challenges attracting and retaining employees,” according to a new survey by Willis Towers Watson. These larger raises coincide with a surge in demand for labor and a shortage of supply of hourly workers and specific professional roles with premium skills.

Catherine Hartmann, North America Rewards practice leader at Willis Towers Watson, said, “On the one hand, employers need to continue effectively managing fixed costs as they rebound from the pandemic. On the other hand, companies recognize they need to boost compensation with sign-on, referral and retention bonuses; skill premiums; midyear adjustments; or pay raises. Or they can utilize all of these options, especially with millions of Americans quitting their jobs, changing careers or postponing looking for employment.”

“Attracting and retaining employees remains a major challenge for employers. In fact, the current environment makes these challenges even more difficult. Employers need to deliver a sound employee value proposition supported by comprehensive Total Rewards programs. Beyond competitive salaries, which are table stakes at the moment, companies also need to focus their spend on a diverse set of health, wealth and career programs to drive employee engagement,” added Hartmann.