Global developments continue to compound supply chain vulnerabilities. But better insight into the risks associated with related economic pressures and inflation will help organizations approach total rewards more sustainably.

Supply chain fragility has yet to show any signs of easing up. The persistence of COVID-19, the ongoing war in Ukraine, rising energy costs, and unrelenting consumer demand are conspiring to push up prices. During the 12 months ending in March 2022, they surged 6.6%, contributing to inflation that was more than three times the Federal Reserve’s target rate.

On the labor market front, wage inflation due to low unemployment now compels employers to pay more for talent, adding to the existing strain on compensation budgets from competitive pressures. In response to this interplay of variables, 64% of employers have adjusted their budgets upward, according to Arthur J. Gallagher & Co’s June 2022 Workforce Trends Pulse Survey. This change accommodates merit (69%), cost-of-living (39%), general (30%), and step (13%) increases. Just 29% haven’t planned any budget alterations.

Colliding price and wage inflation don’t necessarily directly correlate. Consumer prices increased by 8.5% in March from the prior year, according to U.S. Bureau of Labor Statistics data, while the New York Times reported wages grew by only 5.6%, eroding some of the compensation gain for many employees.

Recent measures by the Federal Reserve aggressively raising its benchmark interest rates by a total of about 2.5 percentage points could possibly slow the economy or even lead to a recession, and perhaps jeopardize the ability of organizations to sustain the revenue that’s required to cover higher compensation expenses.

At times like these, it’s important to remember that inflation can be temporary, but wages are sticky. Inflationary pay increases are difficult to rescind, and corresponding cost considerations apply. From an insurance standpoint, compensation growth directly affects workers’ compensation premiums because they’re based on payroll. The risk to the employer is an increase in pass-through costs.

Market changes now happen so often that online salary planning reports quickly become outdated. Without current data, employers lose the ability to address pay increases proactively and objectively, and instead may resort to making decisions instinctively. External advisers can identify where money is spent and offer guidance on variable pay, long-term incentives, bonus plans, and the equitability of compensation approaches.

Matching salary increases to inflation may not be necessary if organizational assets like work culture, connections with other people, or professional development opportunities are highly important to employees. Efforts to package and communicate total rewards effectively also can add value. Ongoing interactions with employees—what employers say and how they connect with their workforce—strongly influence relatability and a sense of belonging.

Getting compensation right is critical for talent retention under any circumstances. Most employers (72%) increased their open positions from January through June 2022, while just 8% of employers decreased open positions, and 20% reported no change, the Gallagher survey shows.

Worker shortages have far-reaching implications that include a higher risk of workplace injury, especially in the first year of employment. Within the manufacturing industry and warehousing sector, 42% of workers’ compensation claims were filed by first-year employees in 2021, compared with 31% a decade earlier, according to EHS Today, an occupational health and safety publication.

A shortfall or an influx of employees calls for strengthening workforce vigilance through proper risk-management orientation on safety practices and procedures. Emergency response plans are an important topic. In 2020, the pandemic and other serious safety and health hazards put an enormous strain on health care workers, contributing to a 249% rise in workplace injury and illness rates, according to a U.S. Department of Labor Report issued earlier this year.

Workers’ compensation injuries have a ripple effect beyond the incapacitated employee, all the way up to the operational output of goods and services. Loss isn’t restricted to claims when the employer must backfill jobs in a tough hiring environment while minimizing the impact on productivity.

While health care delivery system shortages raise costs in real time for nurses and supplies, actual price increases typically lag. Some of that difference in pricing eventually will be passed on to employers and consumers when providers request higher reimbursement.

Health care services, prices, reimbursement rates, and labor contracts are set several years in advance. So even if inflation rates normalize in subsequent years, waves of higher pass-through costs may still roll through.

During inflationary periods when a dollar doesn’t stretch as far, employees may save less for higher education and retirement. Problematically, this lost opportunity can undermine the ability to achieve financial wellbeing goals. Lower discretionary income may also prompt employees to reduce the amount of their employee-paid voluntary benefit elections.

Sometimes personal situations leave little choice, but it’s important to help employees avoid compromising the value of their accident, life, and critical-illness protections, which are offered to fill gaps in coverages and safeguard employee finances.

Many remote employees are returning to the office at a time when rising prices for gas, public transportation, and food make this switch more expensive. Market uncertainties also have increased insurance rates for premiums across several lines, including property and liability.

Planning for the reduction of their corporate real estate footprint has already occurred for many organizations or is underway, and determining the optimal amount of space is a key question as they seek more fluid workspaces.

Rather than mandating a return, some employers are leveraging hybrid work as a cost-containment measure that enables and encourages flexible, purpose-driven office collaboration. Ensuring that agile and remote workforces share the same sense of organizational culture and receive equitable treatment is essential for attraction and retention, and often requires a committed investment.

Unpredictability has become predictable. Since entering this decade, significant and unforeseen events have occurred at seemingly regular intervals, disrupting economies, businesses, and the world at large. But as the calendar continues to turn the pages on the future, people and organizations still show remarkable resiliency. New outlooks shaped by recent experience are already inspiring ideas that will move the world forward in a better direction.

Advances are built on a foundation of proven methods and solutions. For total rewards, a strategic, data-driven approach allows a more holistic view into how well they perform, and external data provides added support for successful spending decisions. Apart from focusing on compensation, exploring and responding to the reasons why their employees choose to work for them helps guide and sustain organizations through and beyond tough times.