HR professionals don’t make their decisions in a vacuum, especially when there’s money on the line. As one of HR’s biggest responsibilities, compensation planning requires diligent research and data collection. From employee performance, to organizational finances, to competitors’ behavior, there are countless factors when figuring a year-over-year salary increase for your employees.
That said, some factors carry more weight than others. When HR professionals and managers look to determine the rate at which to increase salary budgets for their employees, they often look first to the macro-economic indicators in their market. Although these metrics may not seem relevant to a private company’s salary practices, they often form the basis of salary manager’s decisions. Notably, the following factors could be critical in determining next year’s salary increases in your market:
Gross Domestic Product Growth
Gross domestic product (GDP) is a measure of all the goods and services produced by a country in a given year, and it’s traditionally viewed as the most important measure when determining an economy’s value. While the interconnected global economy adds considerable complexity to the situation, GDP growth rates can generally illustrate the health of an economy, and positive GDP growth often correlates with the availability of capital, strong consumer spending, and broader investment. Long story short: rapid GDP growth probably means you (and your competitors) should expect higher salary increases.
It’s basic supply-and-demand economics: the more people looking for work within a given market, the lower the price of labor. This is a gross oversimplification of how the modern talent recruitment and compensation processes work, but there is a clear correlation between unemployment rates and salary increases in a market, particularly in those markets that are dominated by a low-skilled labor or a single industry sector. Indeed, although employers should avoid outright leveraging their availability of replacement labor against their workforce, HR professionals should never overlook the unemployment rate when drafting a compensation strategy.
All that said, the economic factor with the most immediate impact on salary increases (and practices) might be inflation rate. This measure of the change in price for goods and services within a given market can drastically impact the purchasing power of employees, and HR professionals and business managers would be wise to account for inflation rate projections when determining salary increase budgets for the upcoming year. If the inflation rate outpaces the rate of salary increase, employees will experience a net decrease in pay.
Salary increase and compensation planning is never simple, and the best HR professionals are diligent about collecting all necessary information before setting about fixing their employee’s compensation for the upcoming year. While these three metrics are far from the only factors considered, they often form a baseline understanding of the market and allow HR to focus on considering the finer details.
Interested in learning more about compensation strategy? Don’t miss Mercer’s Global Compensation Planning Report, a global report that covers salary increase budgets in 146 markets around the world.