Which Economic Indicators Should Drive Compensation Strategy?
Widely reported economic indicators like median household income and wage growth play a small role in how executives shape their firms’ compensation strategy.
Between 2014 and 2015, Americans got a raise.
The U.S. median household income, as reported by the U.S. Census Bureau, rose to $56,516, a 5.2 percent increase from the year prior, when household income stood at $53,657. But even as the rise in income suggested the outlook for the U.S. economy remained positive, when adjusted for inflation the figure is still lower than in 1999 and before the financial crisis in 2007.
Economic indicators help leaders get a sense of the health of the overall economy, but when it comes to setting compensation, experts say using these figures as a benchmark remains perilous. “A growing economy should drive down unemployment and support wage growth, which implies that a CEO should be vigilant about the need to compete for talent via compensation packages,” said Josh Wright, chief economist at iCIMS, an HR software company in Matawan, New Jersey.
Being vigilant includes being skeptical. While macroeconomic indicators like median household income, housing market data and others are likely to influence executives’ thinking, they shouldn’t drive strategy too much, according to Matt Rivera, vice president of marketing and communications for Yoh, a talent outsourcing company based in Philadelphia. Above all, widely reported macroeconomic indicators are overly general and lag the market, Rivera said, not to mention the fact that they’re constantly revised once they’re reported.
“It’s much more important for [executives] to know the supply and demand of skilled people in the areas they’re looking at,” Rivera said.
That isn’t to say executives shouldn’t follow certain indicators to pair with a more focused compensation analysis strategy. According to iCIMS’ Wright, the major macroeconomic indicators executives should look at when considering their companies’ compensation strategies include:
- Costs of living.
- Price pressures of consumers.
- Local housing markets.
- Consumer Price Index.
- Personal Consumption Expenditures.
Other economic indicators are meaningful when executives are considering their firms’ growth outlooks — an important component that drives future compensation strategy. Rivera said these indicators are ones worth following:
- Interest rates.
- Trade agreements.
- Consumer confidence.
Productivity as a Wage Indicator
Outside of these macroeconomic figures, executives should base their firms’ compensation philosophy around individual productivity and performance.
“Any increase in salary should match additional value created by the employee concerned,” said Dinesh Kumar Hurreeram, associate professor and head of the mechanical and production engineering department at the University of Mauritius, off the coast of Africa. “Unless companies — including public sector organizations — get it right, salary increases will continue without additional value created.”
Lauren Dixon is an associate editor at Talent Economy.