Summary
Inflation's Impact on the Economy: A quick history
“History doesn’t repeat itself, but it often rhymes,” is Mark Twain’s oft misquoted adage. Regardless of who said it, it still rings true. Especially when it comes to inflation.
History teaches us that uncontrolled inflation, manifested by increasing consumer prices can impact everyday workers –and especially those at the lower end of the pay scale. As consumer prices increase, workers’ buying power declines.
What happens when inflation is out of control?
After World War I, Germany’s obligations to pay war reparations led to their printing tons of money to pay their debts. With the exploding supply of the German currency, the value of the German Mark on foreign markets declined, leading to hyperinflation.
As inflation rates exploded, Germans needed a wheelbarrow of money to buy a single loaf of bread.
And let’s not forget a more “recent” history, as some of us seasoned folks remember the double-digit inflation years from 1978-1982. Inflation peaked at 14.8 percent in the spring of 1980, and the misery lasted for four uncomfortable years. Inflation surged and the GDP became stagnant, thus spawning a new term: stagflation. It was caused by the central bank’s increasing the money supply, along with the supply of consumer goods being limited because of a number of often unrelated economic reasons. (Sound familiar?)
If left unchecked, inflation can persist, causing cyclical forces to drive consumer prices even higher. This then drives employee compensation higher as an adjustment for inflation, and the economy cycles into hyperinflation, or potentially something worse.
While very few economists are predicting an impending hyperinflation cycle, economists and pundits have also brushed aside the threat of inflation, even calling these warnings “a mirage.” Federal Reserve Chair Jerome Powell insisted inflation was a “temporary trend,” and a New York Times op-ed piece argued that inflation was “par for the course, historically speaking,” and offered 179 reasons not to panic about inflation.
The Perfect Storm
While many economists were wrong about their inflationary predictions, in their defense, who could have predicted the “perfect storm” of events that happened simultaneously to drive inflation?
As production waned, consumer demand from home-bound households began an unprecedented buildup, potentially exacerbated by Federal programs designed to jump-start the economy. According to the Congressional Research Office, stimulus checks were a driving force in spurring consumer spending in 2020 and early 2021. While it helped many businesses remain solvent, those consumer dollars were chasing fewer goods, driving up consumer prices on everything from food and gas to vehicles and other commodities. This created the classic recipe for inflation: low supply/high demand.
To make matters worse, accelerated baby boomer retirements combined with the great resignation — spurred labor shortages, intensifying the war for talent, and bidding up the cost of labor in products across the board.
By all indications, inflation is here at least for a while, and it’s behaving like that obnoxious ex that just won’t take a hint to move on.
How much is inflation impacting your employees’ purchasing power?
Purchasing power is basically the growth or reduction in how much a consumer can buy with their money. Consumers lose purchasing power when prices go up, especially when their paychecks remain stagnant.
Just how much purchasing power have consumers lost?
According to the latest government statistics, the mean or “average” consumer makes $94,003 before taxes. Using the more conservative Bureau of Economic Analysis inflation rate of 2.4%, that employee lost $2,256 in purchasing power in just 12 months.
With as many as 78% of workers living paycheck to paycheck, this seemingly modest rise in inflation can mean the difference between paying rent, making a loan payment, or paying for childcare.
Employers Respond to Inflationary Warnings
Some employers have already responded to inflation and have offered a higher-than-usual pay raise to help boost employee retention, bolster morale, and keep those pesky talent poachers at bay. However, according to the Conference Board, for 2024, salary projections anticipate a 4.1% increase in wages. While that's an increase over the average 3% pay raises offered over the past decade, it still ignores an actual decline in overall wage increases since 2020.
Given the challenges that most employers face, providing a double-digit wage increase across the board is simply not feasible, not to mention unwise. However, it is crucial for companies to acknowledge the impact of inflation on their employees' purchasing power. Failing to consider this aspect can lead to various risks that will affect recruitment and retention efforts.
Now, the question arises: What's an employer to do?
Finding new and creative ways to offer a pay increase
While some companies may prefer to delay addressing the issue of keeping wages in line with the market, others have the opportunity to explore alternative options to meet the immediate demand for higher wages without committing to long-term salary increases.
With so many perks and lifestyle benefits to choose from, it’s hard for HR professionals to research all potential options for short-term bonuses, let alone vet which ones would work with your company.
We have a few suggestions...
Here are 20 ways to offer your employees a non-wage bonus, and help you offset the impact of inflation.
1- Employee Discount Program
Some companies are giving a one-time student debt-reduction bonus. The financial services firm Fidelity Investments is one of a growing number of employers offering to help employees pay off student loan debt, contributing up to $10,000 per employee for student loan repayment. Fidelity boasts it has helped its employees save over $38 million in student loans by limiting to total loan length and lowering the total interest owed.
3- Tuition Reimbursement BonusA long time ago, someone smart decided to encourage their employees to further their education and also pay their tuition. What they found was these employees were more loyal, more productive, and more engaged. Cigna, in cooperation with Accenture and the Lumina Foundation, discovered that their tuition reimbursement plan delivered a 129 percent return on investment. It has also served to help them recruit some of their most high-demand positions.
4- New Home Down Payment BonusThis study by the nonprofit International Foundation of Employee Benefit Plans (IFEBP), shows that 14 percent of employers now provide financial assistance to help with forming a family. These benefits range from infertility diagnosis, treatment and medication, intrauterine insemination and IVF, to plans that cover egg freezing, the procurement of donor eggs or embryos, and gestational surrogacy.
6- Elder Care Support BonusPaid time off is likely the most appreciated benefit of all, and it can come in many forms. From paid sabbaticals, birthday PTO and summer Fridays off; to things like a four-day workweek or PTO for off-site volunteering at a qualified charitable organization. You can give your employees a significant bonus by paying them to do something productive while they’re not at work. Not only will this have a powerful impact on your employees' focus, but on their well-being and productivity as well. While not all employees may qualify, for many employers, this is powerful option.
9- Appreciation BonusCompanies like Whole Foods are offering hourly employees a one-time “appreciation” bonus of $2-$3 per hour, depending on their role. It’s a way to compete for front-line workers that are in such short supply. Additionally, Whole Foods also provides a 20 percent in-store discount, or 30 percent after employees reach six months of service.
10- Spotify / Headspace subscriptionsMany employees listen to music during their focus time, and a subscription to Spotify Premium can be an addicting benefit that will not only get used but also generate a lot of goodwill. Likewise, Headspace and Ginger are popular meditation apps that can help your employees manage stress and learn how to focus on what’s important. A free subscription can lead to greater employee mental health and stress reduction.
11- Pet Insurance BonusFor larger employers that have negotiated a discounted rate for their business cell phone service, that discount can also be given to employees. Your company can choose to pay all or a portion of the employees’ monthly service, or they can simply take advantage of your corporate discount, which could add up to hundreds, if not thousands of dollars per year.
13- Child Care Reimbursement BonusWhether you want to offer an ISO (incentive stock option) or an NQSO (non-qualified stock option), employee stock purchase plans can offer significant benefits to your employees, making them owners that invest in the future of your business, and reward them for their hard work. For companies that aren’t traded publicly, profit-sharing plans can also accomplish the same levels of employee engagement. If you’re looking for someone who administers such a plan, companies like Computershare can help advise you on the best solution for your company.
15- At-Home Massage/Chiropractic Bonus
This study focuses on the state of workplace wellness and found 25 percent of employees find their personal financial issues are a distraction at work. Offering a holistic financial wellness program offers important tools like an interactive budgeting tool, student loan payoff tool, and live counselors to talk about investing, taxes, retirement planning, building a financial reserve, etc. Organizations like Enrich Financial Wellness Program offer popular interactive courses, as well as interactive tools that will help your employees worry less about their finances and more about their jobs.
17- Travel / Entertainment BonusSome work-related certifications are not only time-consuming but expensive. Encourage employees to earn proof of their new skills, and foster a culture where accreditation is important. Enough so that you’re willing to pay for these courses as a bonus.
19- Investment Club BonusBetter Investing offers a step-by-step guide for starting an investment club. By using an outside source, companies can maintain an arms-length relationship with the club, yet still offer employees a bonus or stipend that can be directed to the investment club. Employees are taught how to set up a brokerage account, establish rules and procedures, and make investment decisions using real money. Sharing investment decisions and responsibilities with a group is a great way to teach employees what they need to know to become wise, independent investors.
20- Charitable Contribution BonusEmployer matching programs have existed for years. Some companies match an employee’s charitable contribution 1:1, or even 2:1 or 3:1. But sometimes employees don’t have the means to make a meaningful contribution of their own to even qualify for the company match. Even though they want to give to a cause they care about, they’re just not yet in a financial position to do so. As a bonus, you can offer to donate (in their name, or as a shared contribution), to a cause an employee cares about.
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While some of these bonuses may come with tax benefits or consequences, others may not be appropriate for your regulatory environment. Make sure you consult with your tax advisor or attorney about how best to make it work for your company.
Let's hear from you
This list of creative ways to compensate your employees surely isn’t exhaustive, so if you’ve implemented an innovative benefit, or if you’re thinking about new ways to enhance your compensation package, we want to hear about it. Leave your comments below so everyone can benefit.