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Published: 2 year

The 50 shades of a pay rise

If I wanted to start with a word cloud, I would put words like inflation, stagflation, price-wage spiral, hedging, fixed capital, retention and so on. Why? Because in reality a wage increase is much more than trying to offset inflation with wages, because it has a myriad of effects in both the long and short term. These effects (I promise there won't be 50) will be listed in a non-exhaustive way.


Since the title is literary, let's stay on this line and ask the question: to raise or not to raise? A serious - and rational - argument against a wage increase has been made in recent days: namely, that it will further accelerate the price wage spiral, so that's not what we should do now. The unions reacted quite vehemently to this statement, but that's their job, but on the employer side it's not easy. A man has to be on his feet who can make his employee look good by saying "How about it, dear employee, by not raising your wages I am only reducing inflation, because neither you nor your colleagues will be buying cooking oil, so in two or three years you will be able to afford it again. So you will soon be grateful to me".

At the moment, the labour market is still severely short of supply, so this direction may not be representative, but it is possible that a turnaround will happen.

Is a wage increase necessary?

Before we start to raise wages, we need to see whether or not our wages are in place in the market or what I am asking for my wages? Determining this is not terribly difficult, as there are quite a few wage databases available for purchase today, but it should be noted that it is very easy to misrepresent wages. It is important to see in which segment and with whom you are competing for labour salaries. If you are a small company of 50 people, don't compare your payroll position with a multinational of 4000 people.

It's a bit of a lost cause if you find out from exit interviews that you're underpaying your employees, but it's not too late to act.

Is there a long-term cover?

One of the downsides of a pay rise is that it is a long-term and permanent commitment, so it is worth looking not just at the current year, but as much as possible in the light of future business. Coverage and retention is the Skeleton and Kharübdis of a pay rise, because if you don't have coverage you are financially vulnerable to stronger players in the market, although this can be offset somewhat by benefits, employer branding or working time discount.

Wage increase or investment?

Strong wage market pressures may have the effect of crowding out and mechanising some live labour, which may stimulate some investment. Investment does counteract the impact of wage increases, but one of the benefits of wages is that it keeps liquidity under control. Investment increases the amount of capital tied up, which can be a problem in a prolonged period of more severe economic downturn.

To whom and how much?

This question is perhaps the most difficult because, while the above are business-based, impersonal questions, here the person, the colleague, with family, destiny and existence behind them, is already present. If we are very humane, we target the lower income group with a pay rise, but here there is a danger that our established wage roll or grades are squeezed and the pay does not reflect levels of responsibility and recognition. Of course, there are some where pay is determined at job level, but I think even there, pay increases are differentiated through the line manager.

If I approach the question a bit philosophically, then the wage increase should not be socially based, but by following inflation with the wage increase -beyond market competition- there are actually social reasons or motivations behind it.


We hear the word price-wage spiral every day, so we cannot pass prices by without a word. It is difficult to imagine that the pricing of our products or services will not be affected by the wage increase that is implemented, so in addition to the fact that customers may face price increases, the expected economic turnaround, whereby the demand side starts to shrink and prices fall, may lead to losing business. So you need to consider whether there is enough margin on the product or service to be able to implement a larger wage increase with a smaller price increase that the market can bear.

Risks and side-effects: is there an alternative to raising wages?

The main risk associated with a wage increase in the current economic environment is the uncertainty about how long the demand-side momentum will continue and how long the labour market will remain in a supply-scarce situation. Therefore, a less risky solution is to increase the income given to the employee through benefits, but to be able to recoup them in case of an emergency and not to have to make redundancies to keep the company afloat.

I may be alone in my opinion, but I think that such allowances should be given to reduce the cost to the employee in the first instance: workplace meals, job travel and other allowances. I would include home office, group benefits, working time discount, higher cafeteria allowance, discounted shopping, free coffee and drinks, private use of company car, and who knows what else that people more creative than me have already or will come up with.

In addition to the above, it is certainly possible to think of other aspects along which to assess risk in the context of a pay rise, but perhaps I have managed to show some aspects that have been used to stimulate (further) thought.


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