So, with CPIs hovering around 3-3.5%, and most surveys showing 3.5-4.0% increases in salary budgets for 2007, life’s a breeze, right? Just add the percentages into the Excel formula, press “Enter,” and you’re done, right?
Actually, wrong.
Enter “wage inflation.”
I’m going to avoid the ecomomist argument that higher wages do or do not cause inflation. That’s just not our relative concern here. What is clearly our concern is that our currently strong economic growth lowers general unemployment rate. This, theoretically, can cause businesses to bid up the price of labor and (hopefully) pass through those higher costs in the form of higher prices.
If only it were so easy. As the CPI shows general inflationary trends (e.g., our product/service cost increases), wage inflation is an additional cost on top of inflationary pricing. In other words, it’s a potential incremental cost.
Now, again theoretically, profit-conscious firms aren’t going to hire employees at a rate of pay more than his utilitarian or marginal value, or more than the additional revenue earned. Hardly rocket science, right?
The reality, however, shows that sometimes wages do increase faster than general inflation, particularly for individual functions, positions and/or jobs, rather than an overall employment market.
Enter compensation planning. It’s easy to get in a cyclical rut: analyze the jobs, survey the market, establish a range. Then adjust for infation a couple of years and start all over again. That’s simply not enough. We must pay close, specific attention to the inflationary movement of key positions within our organziations and adjust accordingly — or at least be acutely aware of the disparity. No reason for a surprise here.
Sometimes compensation planning takes foresight, analysis, and a real awareness of what’s going on in the world.
Don’t get caught napping…
