Companies Try to Limit Salary Bumps, Focus on Perks

Corporate spending on wages and benefits in 2021 accelerated at the fastest rate in two decades amid record resignations, according to the U.S. Labor Department. But for many employees, those adjustments haven’t been enough to keep pace with the rising cost of living. Wages and salaries for job holders who have been in the same role for at least one year have been rising at a slower pace than inflation, increasing 5.9% in December compared with inflation of 7%, Gartner found when analyzing data from the Labor Department and payroll firm Automatic Data Processing Inc.

Companies hope nice-to-have extras like more vacation can boost their reputation as good places to work and keep workers on board in today’s tight job market, even if salary gains don’t match inflation.

Companies rarely adjust base salaries directly in response to economic data and instead benchmark their employees’ salaries and benefits against competitors. Boosting salaries for all employees can be expensive—and permanent.

Chief financial officers weigh a range of factors when determining compensation budgets, including their ability to pass along higher salary costs to customers. Many companies over the past year have reported their highest profitability in years on the back of strong demand and price increases.

“I’d love to pay everybody as much as possible. But I also need to make sure the company remains competitive,“ said Chris Cage, CFO at government contractor Leidos Holdings Inc.

Employees at the Reston, Va.-based company said in internal surveys that flexible work arrangements, rather than pay, are the priority. The company’s median salary is $100,524, according to its latest proxy filing.

Leidos last month said some employees could work from home on a permanent basis. The company offered benefits such as access to a meditation app and financial counseling services. And it is having more conversations with its employees about long-term career options.

The company plans to spend more on compensation this year than in 2021, including on merit-based increases for high performers, Mr. Cage said, but declined to say how much. He said Ledios is allocating “in the millions” toward new perks, benefits and training. Leidos earned $759 million in 2021, or 21% more than a year earlier.

Cosmetics company e.l.f. Beauty Inc. has also offered new perks, including offering meeting-free afternoons after 2 p.m. on Fridays, in part, so employees can have added flexibility with their personal lives.

Last year the company closed its offices all of Thanksgiving week. In previous years it closed for a half a day on the Wednesday before the holiday and the whole day on the Friday after.

The company plans to adopt a hybrid work model, asking employees to come into the office one to two days a week starting in March, and three days a week starting in April, with catered lunches on Thursdays in an effort to make the transition back to work easier. Its accounting staff can permanently work from home, CFO Mandy Fields said.

E.l.f. over the past year adjusted all salaries by a low-single-digit percentage to reflect the higher cost of living, Ms. Fields said. It will decide in March how much to boost salaries for its next fiscal year, she said.

“Employee salary is one portion of it, but it is a much bigger picture than that,” Ms. Fields said, referring to the company’s compensation package, which also includes equity grants for all employees. Profits rose 45% during the quarter ended Dec. 31, to $6.2 million.

Companies over time will likely have to boost employee pay across the board to keep pace with the run-up in inflation, said Jason Furman, a senior fellow at the Peterson Institute for International Economics, a research group. But it is unclear how long it will take before they do so, he said. “Workers are going to demand more. And businesses can afford to pay more because…their products are selling for more,” Mr. Furman said.

Forty-five percent of respondents in a recent survey of 892 human resource professionals from the Society for Human Resource Management said they began offering more flexible work arrangements during the second half of 2021 to reduce turnover. Other respondents said they offered merit, spot or referral bonuses or provided training opportunities. Just over two-thirds of human resource professionals said starting salaries at their companies were higher than they were a year ago.

Boosting salaries is a costly proposition for companies, said Tony Guadagni, senior principal at Gartner. Facing higher expenses for salaries, companies need to assess the risk of employee turnover. While some businesses aim to be compensation leaders in their industries, most are focusing on more affordable options to encourage retention, such as perks, Mr. Guadagni said.

Companies are already paying up to recruit new employees. Job switchers in December increased their salaries by 8% compared with what they previously made, according to Gartner.

Childcare provider Bright Horizons Family Solutions Inc. last year increased wages for all of its daycare providers and early-childhood educators by between 4% and 5% in response to the tight labor market, with some employees seeing high-single-digit percentage increases in their pay.

“There have been a lot of strains on this workforce,” said Elizabeth Boland, CFO at the Newton, Mass.-based company. Bright Horizons expects to pass most of the additional costs on in the form of higher tuition fees. It expects to raise tuition by between 5% and 6% in 2022, compared with annual increases of between 3% and 4% in previous years. Bright Horizons last year earned $70.5 million, compared with about $27 million in 2020.

Clinical laboratory company Quest Diagnostics Inc. in 2021 spent between 3% and 4% more in total on compensation than in 2020, in part because of special bonuses and overtime for employees following a surge in Covid-19 testing. The total cost, including benefits, was about $3.5 billion, Mr. Guinan said. In 2022, the company expects compensation costs to rise by between 2% and 3% due in part to lower overtime costs. Quest, which has about 50,000 employees, last year generated about $2 billion in profit, up 39% from a year earlier.

Over the past year Quest began conducting what it calls “stay interviews” with certain employees to keep them from leaving. The goal of the interviews, which also include managers, is to listen to employee concerns and let them know they are valued, said CFO Mark Guinan.

“I think providing both the manager and the employee with this venue is really, really helpful,” Mr. Guinan said.

Write to Kristin Broughton at [email protected]