Fair Employee Compensation in Times of Inflation

Life is expensive.

This statement rings true for most countries around the world with inflation putting pressure on wages and living costs. In Canada, the cost of living seems to have surged over the past couple of years, so much so that Canadians feel it with purchases as big as a house, and as small as a bag of milk.

It’s a hard pill to swallow, but if you aren’t adjusting employee compensation according to inflation, you’re effectively giving your employees a pay cut. We know that isn’t what you want (that’s why you’re reading this blog, right?) – so, we’re giving you strategies to help you manage compensation during times of inflation while balancing your company’s finances, to keep both your business and your people thriving.

Let’s dive in!

Understanding inflation and its impact

Inflation is defined as “a general increase in prices and fall in the purchasing value of money in an economy over a period of time”. As inflation rises, the purchasing power of money lessens, meaning the same amount of money buys fewer goods and/or services. This decrease in value is felt not just by employees, but by businesses, too – causing a ripple effect throughout the economy.

The impact of inflation is evident when we look at Canada’s recent history. In 2022, after the COVID-19 pandemic, inflation rates spiked due to increased demand and supply chain disruptions. In fact, inflation reached a 40-year high in June of 2022, with rates peaking at 8.1% (Statistics Canada, 2024). Basic necessities, like groceries and gas, saw significant price increases, putting tough financial pressure on Canadian households.

For employees, higher inflation means the money they’ve worked hard to earn often fails to keep pace with the rising cost of living – simply put, Canadians have less buying power. Beyond being able to afford the essentials, employees may also feel an impact on their overall morale and well-being. Financial stability matters, and with bills to pay, savings to think about, and inflation slowly eating away at wages, it can be difficult to feel truly secure. Employees may feel undervalued and stressed, which can impact business through high turnover rates and decreased productivity. Understanding these dynamics is important for any employer aiming to maintain employee satisfaction and motivation.

Why fair compensation matters

We could make this a whole section that addresses retaining top talent and increasing employee satisfaction, motivation, and productivity – but what it really boils down to is this: fair compensation matters because people deserve to feel adequately compensated for their work. They deserve to feel that their contributions are recognized and valued.

The challenge for employers

It all sounds so easy: pay your employees fairly so they feel valued and contribute positively to the company. In reality, you’ll face the difficult challenge of balancing wages and budget constraints. Times of inflation often lead to tighter business budgets, meaning a constant struggle between fair compensation and overall financial health.

But there are long-term impacts to consider. While financial constraints may seem to take priority in the short-term, investing in your workforce's long-term sustainability is crucial. Failing to provide fair compensation and invest in your teams can lead to consequences such as skill gaps, decreased organizational adaptability, and low employee morale.

Strategies for navigating fair compensation

Conduct regular compensation reviews

The economy is constantly changing, so conducting regular reviews of compensation packages is crucial to ensure your salaries remain competitive and fair. Benchmark your organization’s pay scales against industry standards and adjust for inflation to keep pace with economic changes. This proactive approach not only helps retain employees but also strengthens your position as a competitive employer.

Get creative with your compensation solutions

You can try exploring alternative ways to reward your employees. Non-monetary work perks such as flexible work arrangements, professional development opportunities, additional paid time-off, and wellness programs can make your employees feel valued just as much as money.

Focus on total rewards

Compensation goes beyond a base salary. Develop a total rewards approach for your employees that includes health benefits, a retirement plan, and other perks that enhance their financial security and well-being. This is where feedback is handy; ask your employees what they could really benefit from so you know you’re giving them what they want/need.

Ensure transparent communication

At the end of the day, clear and honest communication with your teams about compensation will help to foster trust and reduce uncertainty, two invaluable things during times of inflation.

Engage your employees in open discussions by holding Q&A sessions where they can address compensation concerns and better understand the company's financial context. Transparency about budget allocations, including how compensation decisions fit into broader financial priorities, can foster trust. For example, if your company is unable to provide large salary increases due to financial constraints, clearly communicate this and consider offering a percentage range (e.g., 1-5%) as a guideline for increases. This sets realistic expectations while showing effort toward fairness.

Also, sharing a high-level breakdown of the company’s budget with senior leadership and equipping managers with this context can prepare them for more informed and empathetic conversations with their teams. Creating ongoing feedback channels, such as anonymous surveys or suggestion boxes, ensures employees feel heard and valued in the process.

Wrapping up

Fair compensation is an art. It’s about giving your people what they need and deserve all while balancing your books. But the good news is that you’ve already taken the crucial first step: seeking out resources to help you!

The people who help you build your business matter the most – and if they don’t feel taken care of, your business ultimately suffers. Employees are people at the end of the day, and people deserve to feel valued.

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To dive deeper into the topic of compensation, check out these resources:

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