More Money, More Problems

Employees Requesting Higher Pay & the Impact on Employers

“I’d like a raise.” It’s becoming more common for U.S. employers to hear requests for higher wages from their employees. And it’s getting ever more challenging to meet them.

Given the ultra-competitive labor market, higher inflation, and the trend toward pay transparency, employee demands for raises can create financial challenges for employers.

Why? Let’s look at 3 reasons:

1. Raises are trending up, but they’re not keeping up with inflation.

After several years of modest increases, employers are shelling out higher salaries. This year, in fact, they’re budgeting 4.3% of their total payroll to spend on raises, which is the highest level since 2001, according to data from The Conference Board.

However, it’s not enough to cushion the rising effects of inflation. Prices for goods and services were 7.1% higher in November compared to a year ago, according to the consumer price index.

Just consider the average cost of groceries over just the last couple of years. According to economic data from the U.S. Department of Agriculture (USDA), grocery prices increased by 11.4% in 2022, more than three times the rate in 2021 (3.5%) and much faster than the 2% historical annual average from 2002 to 2021. 

Impact on employers:
To boost salaries, there’s growing potential for employers to offer higher compensation beyond the annual cost of living raises. For example, some employers are considering awarding retention bonuses, cash incentives, and merit awards to their employees. According to a recent Gartner survey, 57%of CFOs say they’ll increase funding for compensation, which is already the second-highest spend item in budgets.

2. “Staying-put” workers receive raises, but “job-changers” score even higher ones.

Payroll services company, ADP recently reported that employees overall received 7.3 percent more pay over the past couple of months. But those who changed jobs pocketed a whopping 15.2 percent increase in salary, more than double that of employees who did not switch jobs.

In a survey that asked workers why they quit their jobs, Pew Research found that compensation was a main reason. 63% of respondents said low pay was a factor in their decision to leave.

Impact on employers:
With 11 million job openings currently available in the U.S., employees have plenty of opportunities for work. So, the risk of turnover remains high for employers who are slow to meet requests for employee raises. In a recent poll, almost half (48%) of employers said their company is experiencing greater turnover… a trend that can cost them on average more than $57,000 year in hiring, training, and lost productivity.

3. Greater salary transparency promises to close wage gaps but can also narrow profits.

As greater awareness for pay equity is advocated, some states (e.g., Colorado, California, Washington, New York) have passed salary transparency laws requiring employers (with a certain number of employees) to list salary ranges on job postings, and in some cases, current positions. While this trend is expected to close wage gaps among underrepresented groups, it is also expected to give employees more leverage to negotiate higher salaries.

Impact on employers:
Wider optics into how much employers pay workers can impact overall profit margins and create other issues for employers, including:

  • Raising the cost of hiring new staff – since they can result in funding bigger talent acquisition budgets.
  • Making it more challenging to fill open positions ­– if salaries don’t keep up with competitors.
  • Making it harder to retain employees and keep them satisfied – since there’s greater awareness for how much newer colleagues earn, and how much more employees can earn by seeking jobs elsewhere.

Of course, pay raises aren’t the only factor in employee compensation. Health insurance benefits, flexible work arrangements, employer contributions to retirement plans, meal subsidies, and tuition reimbursement are all part of an attractive compensation package today that can help employers retain employees and keep them happy.

5 Ways to Offset the Raises Your Employees Expect this Year

According to a recent Gartner survey, 57%of CFOs say they’ll increase funding for compensation,  the second-highest spend category in corporate budgets.

In fact, many employers plan to raise salaries by more than 4%. Some are even looking at awarding incentives and one-time bonuses to retain employees.

The big question – can employers afford it?

The truth is, employers can’t afford not to. Particularly in industries where it’s been more difficult to keep existing workers and hire new ones, like retail, manufacturing, education, and healthcare. In these sectors, there are now more job openings than qualified candidates, according to the U.S. Chamber of Commerce.

In recent blogs, we’ve featured insights from our experts about how employers can lower benefits costs within their organizations.

Here are five ways you may want to consider capturing savings and offset the cost of pay hikes at this time.

1: Use data to trim benefits

Not only can you poll employees to learn which benefits are valued most, you can also learn which ones are seldom used… and consider removing them from your offerings. You can also analyze your health plan claims data to see which employee trends may be inflating overall costs. For example, you can spot recurring charges for expensive care when more economical options are available then take action to reverse the trend and pocket the savings.

2: Consider a high-deductible health plan (HDHP)

If your workforce is young and healthy, high-deductible health plans can provide an option to lower your monthly premiums. The catch is, employees pay more out-of-pocket at the time they need services (until they reach a certain amount or deductible). Higher deductibles mean lower premiums for businesses. For example, in 2021, the average annual premium for an employer-sponsored family coverage plan was $22,221. However, average annual cost for family coverage with an HDHP was almost 10% less at $20,802.

3: Optimize lower-cost sites of care

To help further rein in costs associated with health insurance benefits, make sure employees understand which options can deliver the most appropriate care at the most cost-efficient sites. For example, telehealth, urgent care facilities, imaging centers, infusion clinics, and ambulatory surgery centers (instead of in-patient hospitals or ERs) can all help to cut costs.

4. Review contribution models

Given today’s war for talent, finding an optimal premium cost-share arrangement is key. Striking the right balance between reining in costs and offering valued health insurance can make a difference in successful talent acquisition and retention. Last year, employers contributed an average of 80% of the premium cost for individual health insurance coverage.

5: Leverage alternate funding options

Although they may be expensive and complicated to set up, alternative funding options can offer some employers a choice over fully insured models of healthcare (i.e., where employers pay health insurers for coverage) and a way to manage healthcare costs over the long term. These include:

  • Self-Funding –allows more control over health insurance budgets, can improve cash flow because premiums aren’t prepaid to a separate insurer, and may subject employers to less regulation and taxes than other types of plans.
  • Level-Funding – lets employers pay a fixed amount into its own fund to cover claims, TPA fees, and other expenses, offering the potential for a refund if actual claims, costs, and expenses are lower than estimated. It can also help employers better predict monthly costs and improve cash flow.
  • Reference-Based Pricing (RBP) –which lets an employer pay healthcare providers a set price (based on standard CMS charges) for health services instead of negotiating prices with them. Since it caps how much an employer will pay for services and avoids network contracts, which tend to increase every year, RBP offers the potential to lower costs. (Typically adopted by self-insured plans.)
  • Captive –lets a firm take financial control of costs by acting as its own insurance company, instead of paying premiums to a separate health insurer. It can lower the risk of escalating renewals every year to provide more stable pricing.

Of course, every employer’s situation is different. For guidance about which benefit strategies may help lower costs for your organization, contact a member of our Employee Benefits team today.

This material has been prepared for informational purposes only. BRP Group, Inc. and its affiliates, do not provide tax, legal or accounting advice. Please consult with your own tax, legal or accounting professionals before engaging in any transaction.