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Labor costs are rising and putting employers at risk of falling behind


Employers are at risk of falling behind rising labor costs, as labor shortages drive compensation higher. A recent release by the Bureau of Labor Statistics cites that wage and salary costs for private sector workers increased 4.6 percent for the 12-month period ending September 2021.  That is double the increase that occurred the prior year. If this upward trend continues at the third quarter pace of 1.5 percent, we are looking at a total increase in labor costs of six percent over the next 12 months.  

Employers have been raising their budgets back to pre-pandemic levels, increasing by just over three percent, but they are still not keeping pace with the labor cost increases. If labor costs end up double what employers budgeted for, companies will fall further behind. Essentially, companies are not planning to pay people what the market is demanding. All indications are that rates will continue to increase, so failure to act now will make it harder to hire and retain employees.

What should executive teams do to protect their organizations from this problem?

Immediately, executives and human resource managers should benchmark current compensation to their market, and stop relying solely on published studies. Most published studies on compensation will lag behind the rapidly changing market.

Instead, increase the data published in 2020 by at least five percent (and add at least three percent per year for data older than 2020), and then look at what’s happening in your community to ensure those figures are competitive with key employers.  


What are the steps to benchmarking compensation and getting your personnel budget up to par?

  • Bring entry-level pay up to par

Immediately review the current pay, and pay offerings, to entry-level employees. Understand that everyone competes for the same people for entry-level jobs (because those people can work everywhere), so if big box retailers are starting people at $15-$20/hour (Costco announced $17 in October 2021), then it doesn’t matter what your industry is doing – you have to pay people that much.

  • Value your team equitably

Set up a strategy to address compensation for current employees and those in management and executive roles. For example, if you are currently hiring entry-level people at $12/hour, and increase that to $16/hour, then you need to compensate higher-level employees more than $16/hour. New hires with comparable skill and experience should not make more than current employees performing the same role, and there always needs to be a differential between job function levels. If you currently maintain a $4/hour differential between employees in two different jobs, you’ll need to continue to have a differential (although not necessarily $4), in order to maintain equity.


Why is it so important to act on this now?

Simply put, if executives and human resource managers do nothing as a result of this labor cost increase, they will lose employees, and they will not be able to hire new ones. Refusing to update your compensation structure to meet the current job market is akin to refusing to value your team properly. Employees who don’t feel valued will be more receptive to recruiters who are now recruiting virtually for every position they have, with very few unemployed people to choose from. All companies are hiring people away from competitors and across industries. If employees are not valued properly, they may leave without even giving their employer a chance to offer an increase to retain them.  

The bottom line is that employers who are increasing pay are hiring and retaining teams successfully. Those who are not updating their compensation to match labor costs are struggling to find, and keep good employees. 


This upward trend is not stopping any time soon.

Wages will continue to accelerate until they reach high enough levels to attract people back who have left the workforce, and/or until employers cannot stay in business. It will then stabilize at a “new reality.”

Ensure your company survives this with your mission, your team, and your bottom line intact. Update your compensation structure now.

By Edmud B. Ura, founder and president of ElementOne Consulting, Inc. Contact us now to update your compensation structure with the help of our team.