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In the face of the “Great Resignation” and rising inflation, organizations are taking a second look at the size of their salary increase budgets. For the last decade, budgets for merit increases have hovered around 3%. Now, salary increase budgets are on the rise to levels not seen in years, according to BDO’s first-quarter 2022 Salary Increase Budget Pulse Survey.

The average 2022 merit budget set in Q3 2021 was estimated to be around 3%, in line with previous years.

However, as 2022 approached, the talent shortage persisted, and it became clear that salary increase budgets needed to be higher. Merit budget predictions in Q4 2021 increased to just under 4%.

At the same time, the rate of inflation was increasing to levels not seen since 1982. BDO anticipated that these two factors would continue to pressure salary increase budgets to continue rising. To confirm our hypothesis, we conducted a pulse survey to determine the current state of organizations’ salary increase budgets.

We polled 440 organizations of various sizes across multiple industries, including 127 nonprofits, in January and February of this year.

The findings revealed that compensation budgets are averaging 4.4% for all survey participants and 3.8% for nonprofits. When we focused on those companies and organizations that had recently changed their increase budgets in response to market conditions — almost half of all surveyed — the upward movement in salary budgets was even more pronounced, with compensation budgets increasing to an average 5.1% overall and 4.4% for nonprofits.  

Put into historical context, the last time salary increase budgets were more than 4% was in 2001. The last time they were 5% or more was in 1991, according to the WorldatWork 2019/2020 Salary budget Survey.

For nonprofits, this may be a significant shock for their 2022 budgets, as a 4.4% budget increase represents a 47% hike compared to the previously standard 3% budget. It is likely that many organizations are not in a position to increase salary budgets to this degree.

For employees, even a 5% salary increase may feel like a loss in buying power as the Consumer Price Index (CPI) is currently standing at 8+ %. However, the impact will vary by situation: For instance, the cost of gas increased by 38% for the 12-month period ending in February, placing a significant burden on those who commute by car or need a vehicle for their job.

Organizations will need to take steps to both support their employees and ensure continuity of services. Below are some ideas on how to help bolster your workforce:

• As energy prices rise, consider extra financial support for employees that need to commute by car or drive as part of their job duties. This can be delivered in the form of gas cards, parking vouchers, or passes for public transportation to encourage its use. Take note of and disclose potential tax implications for both the organization and the employee.
• If increasing your budget for merit increases is not feasible at this time, consider doing a mid-year assessment to determine whether a second pay adjustment is needed and can be supported.
• This is an important time to identify personnel that are mission-critical, as well as top performers to ensure their contributions are recognized and reflected in pay levels according to the organization’s pay policies and financial condition.
• While there are always exceptions, lower wage employees are the most impacted by inflation and their salary increases typically do not result in a significant change in purchasing power. As such, focus salary increase dollars on those who are most impacted.
  • Allocating more of the budget to pay increases for lower-paid employees can do more than just promote retention, it can help differentiate your organization as one that prioritizes fair compensation practices and demonstrates that management values its employees.
• Stay focused on the mission and how to reach organizational goals despite the current challenges.

Just as the economy fluctuated beyond our expectations over the past two years, we cannot predict what will happen in the next three months, six months, or a year. However, it is important to take care of employees and to do so in the most pragmatic way possible. The current environment presents an opportunity for compensation professionals to think strategically about the best approach for their organizations both now and going forward.

Written by Judy Canavan and Michael Conover. This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” Blog (April 22, 2022). Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com 

At Cavanaugh & Co, we work with nonprofits to help them make smart financial decisions. Contact us today to schedule an appointment.