9 December 2015 | By Justin Hobday Community

The dangers of wage inflation

Salaries are rising – and firms must tread carefully when recruiting or retaining top talent in a competitive environment.

Salaries are rising at their fastest rate in years – the latest sign that the economy is growing and a sure sign of more stability. It has given employees a lot more bargaining power, particularly at board and executive level, and especially in industries where skills are in short supply.

But wage inflation in this scenario – if not managed properly – could have long lasting negative effects.

Organisations that were previously risk averse are now going to the market with much more confidence and frequency – and with larger remuneration packages. They are willing to do what it takes to secure or retain their key talent, albeit with stronger links between pay and performance than in the past.

Most organisations realise how important their human resource is to gaining a competitive advantage. And they shouldn’t always interpret external interest in their employees negatively. Great talent will always be coveted by competitors, so if they’re not being approached, they might not be as good as you think they are.

I’ve come across several scenarios recently whereby a candidate is very interested in a new career proposition only to be persuaded to stay put by a large counter offer from their current employer. In many cases that is not just a direct financial reward, but also promises of specific career progression.

You might say that this is par for the course in the corporate world where poaching has become the norm. But it has created a knock-on effect – persuading an employee to stay might seem like a great coup, but it can create a very poisonous team environment with his or her peers now posturing for their fair share as well.

So was it worth persuading them to stay?

There is no right or wrong answer to this question.  Every organisation must navigate the same waters and decide who’s worth keeping or not. But I believe that too many make hiring or retention decisions based on the immediate scenario; and too few take the bigger picture into account or consider the long-term effect that salary inflation and correction can have on their organisation.

In the end organisations must decide upon the overall value they place on an employee. Without considering the wider implications of wage inflation, the damage may be difficult to manage or repair.

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