Companies Begin to Dismiss Annual and Review Worker Pay More Frequently

  • On March 29, 2022

As the demand for U.S. workers continues to increase, some manufacturers, technology firms and other companies in various sectors are dismissing the traditional annual raise and are switching to more frequent pay reviews as they compete for talent and keep pace with rising wages.

One company last year started doing quarterly pay reviews to ensure it could hire and retain workers for critical and hard-to-fill manufacturing roles such as production operators and maintenance mechanics. Hiring around 1,300 people in the U.S. last year, they continue to bring on new people often meant paying above its usual ranges.

As the economy adjusts to previous and current impacts, U.S. companies and small businesses have been competing for employees in a historically tight labor market. Employers added 6.7 million jobs last year, yet U.S. job openings and worker turnover are hovering near their highest levels yet. The trends are spurring wage growth, as they climbed 5.7% in January from a year earlier, and nearly doubled the average gain before the pandemic hit.

Full off-cycle salary reviews remain relatively rare, surveys indicate, and executives say companies can turn to other options, such as using one-time bonuses, expanding benefits or adding vacation days to help retain workers without boosting wages. In one survey, about half of respondents said they didn’t plan additional reviews or salary increases to address inflation this year, but nearly a quarter said they were considering. Around 20% of respondents noted a plan to review off-cycle salary increases as needed in 2022, while only 6% of the estimated 2,565 human-resources managers from the survey decided to review compensation two or more times this year in response to rising prices.

Companies that also offered higher pay for new employees shrank the difference between pay for tenured workers and their newer counterparts, resulting in a quarterly review. It ensures that the experience of existing employees, who may have been hired in a less-competitive job market, are rewarded appropriately. As a result, compensation expenses for the company’s critical roles rose about 10% last year, and researchers are expecting a similar increase this year. This type of review schedule also means companies can adjust quickly if the market softens to prevent overspending.

Keeping record of these changes also assists hiring managers set baselines for the biannual reviews as they learn where the market is going much more quickly, allowing them to have an easier time predicting where things are going based on the data gathered. The increases coincide with efforts to bolster employee benefits, something companies are now detailing as a long-term investment. The flexibility of the schedule also allows companies to explain to their employees why those changes are being made, such as the dependency of the labor market and wage trajectories.

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