Inflation and compensation FAQ

31 Jan 2023

By Laura Willming

Against a backdrop of rising inflation, Laura WiIming, Head of Portfolio Talent at Octopus Ventures, answers the pressing compensation questions.

Q: Should I increase everyone’s salaries at the rate of inflation?

No. While this is a consideration, it is not the only factor that goes into determining an employee’s increase. We would recommend that you follow your usual process for calculating % increase for employees.

Q: It feels like I should do ad hoc changes at the moment, what do you think?

It is best to avoid ad hoc changes as much as possible as this sets a precedent for how the company calculates compensation and, in a world where there are so many volatile variables that can and will affect employee’s purchasing power, this could become hugely problematic going forward.

Q: We typically do a cost of living increase of 2% – 3% across the company each year. If cost of living has gone up by more than 8% shouldn’t we do the same?

It is definitely a consideration, but again, not the only factor that you take into consideration in a typical review cycle.

Other factors would be the business’s financial position (what can you afford), the relative benchmarks for the salaries being reviewed, and performance of individual employees.

Ask yourself, too, what you want your employees to attribute compensation changes with? (i.e. Inflation, performance, individual responsibilities, etc.)

Q: Okay, but I am worried that every other company is going to match inflation – do you have any benchmarks?

Salaries have risen across the tech sector throughout 2021 and 2022, which you have likely seen in recruitment yourself. Actual benchmarks using comp data will be helpful here, in combination with any recruitment data you have.

We have been unofficially polling various businesses to get a sense of the general approach to the inflation question, and have not heard yet of businesses taking the broad stance of raising salaries just to match inflation.

In the Lightspeed Ventures report, most companies are planning a budget of a 3% – 6% increase overall.

A risk of doing ad hoc changes is that it could set a new norm that could set expectations for years to come.

Q: And should I take action right away, or within the normal review cycle?

If you are concerned, then do run a short exercise to review salaries at the moment, and make ad hoc changes where you’ve identified any big risks.

But we do recommend you stick with your typical review cycle if you can.

Q: What else should I be thinking about / factoring in?

Do review the compensation of employees who have not had theirs changed within the past 12 months.

Make sure there are no discrepancies between individuals in similar roles (i.e. same level and scope) especially those that have recently joined. If there are, do understand why that may be and adjust accordingly.

If there are cash constraints, talk to employees about this and be sure to keep reminding them of the purpose of the business and vision for the future. They joined a startup well aware that there may be some cash constraints at different moments in time.

We do recommend creating role levels and related compensation bands to help with decision making in the future, if you don’t have them already.

Notes:

Big comp changes are not the only way to reward and recognise employees. Here are other ideas:

Spot bonus to recognise exceptional performance.
A ‘cost of living’ bonus for employees who are most impacted (below a certain salary threshold).
Equity grants can help signal to employees their long term value creation to the business.
Offer to pay for an experience: £500 for a date night with your partner. An extra day off! All the above!

Other notes:

Historically, salary changes and inflation tend to be around the same amount (2 – 3%).
During the period of March 2020 – March 2021 (pandemic) inflation dropped to near 0, and rose to 2.5% in 2021.
During this period, wage growth outpaced inflation by more than 5%, reconvening at the end of 2021.
In tech, salaries grew at 10% on average, across roles and levels during this period.
If you hired anyone after Jan 1 2021, chances are you willingly increased your budget due to the great resignation and subsequent ‘war for talent’.
You likely had to increase internal salaries as well, to keep up with these changes.
If you did not, then those individuals are likely benchmarking to the bottom quartile of the market and could find an increase in compensation elsewhere.