Inflation has hit the highest levels many countries have seen in decades, causing ballooning bills and workers concerned they might not be able to keep up.
According to the Office of National Statistics, the current rate of inflation in the UK sits at 10.1%, far beyond the target of 2%. Annual inflation for the 19 eurozone countries has reached a record 8.6% and in the US, the figure is 8.5%.
Lots of people have turned to their employers. Many argue that salary increases are essential to help with the rising cost of living, while others believe sudden wage rises will only contribute to growing inflation rates.
How are startups responding? Sifted crunched the numbers and spoke to the experts.
Mirroring the market
Research into over 200 companies conducted by Figures, a compensation app for startups and scaleups, found 75% of companies headquartered in the US have already taken action when it comes to salary raises or bonuses. 59% of the UK are taking the same approach and just 31% of companies based elsewhere are responding.
While a salary refers to the amount of money your employer pays you every year for the work you do, compensation is the combination of your base salary and any extra financial benefits (like bonuses or insurance).
“The majority of companies in Europe seem to be taking the ‘wait and see’ approach until the end of the year, a time when compensation is often discussed,” Virgile Raingeard, CEO and cofounder of Figures, tells Sifted. “Founders are also looking at other companies to see what they’re doing, because most haven’t dealt with such huge inflation before.”
Raingeard believes that a key consideration for founders reviewing compensation is their own core belief on what their level of responsibility is to employees.
“Some think it's not their personal responsibility and instead believe the wages they provide should be tied to market rates for a given position,” says Raingeard. “Others say they want to take action and help their employees.”
The bonus approach
What does this help look like? The Figures survey found that many startups are approaching financial compensation in the form of one-time bonuses. Of respondents using this method, 71% gave a bonus to every employee and 29% provided it based on working location.
But tax exemption laws — that have been in place since the peak of the pandemic — are having some impact on founders’ decision-making when it comes to bonuses. In countries such as France, exemptions can be provided to locals on lower salaries.
“A French startup I work with gave a one-time bonus to everyone in the company that earned below the median wage in France — €39k — who would therefore benefit from tax exemption,” adds Raingeard. “I like this way of doing things and would encourage most founders to at least consider it.”
A challenge for management
However, not all startups are convinced. Ciara Lakhani, chief people officer at password manager and digital wallet app Dashlane, has witnessed how employees at the startup are being affected by inflation. But she believes this has introduced a distraction into the workplace and a new challenge for management, with more staff asking about their pay.
Just because inflation can go up, it doesn’t mean that pay goes up the same amount
“We believe that compensation represents supply and demand,” says Lakhani. “Just because inflation can go up, it doesn’t mean that pay goes up the same amount. When you look at inflation two years ago when it was low, tech salaries still went up at a much higher percentage.”
Lakhani notes that many earlier-stage companies have raised wages in reaction to the cost of living crisis but says this could be due to lack of past experience with inflation or operating in just a single or few countries. A better approach, she adds, is that of many larger or later-stage companies, which don’t offer one-off financial compensation.
“When it comes to pay increases, I try to think about what is a scalable, fair and objective practice that the company can put in place and feel confident that we can keep doing over time,” says Lakhani. “If I do something this year that I will have to take away in the future, people might be more upset then or even quit. That’s not in anyone’s best interests.”
Communicating your stance
The Figures survey found that 20% of startups surveyed won’t be offering any financial support to their employees in response to high inflation.
While there is much debate on what the best approach is, a recent survey found the majority of workers who quit in 2021 cited low pay as their main reasoning. In the midst of a digital skills shortage and what has been coined the "Great Resignation", Raingeard says communication has never been more important.
“Companies that are not even proactively addressing the topic internally should reconsider,” he says. “Communication with your employees is important: take a stance and educate your people on why you're taking this approach and how you came to this decision. Companies that do this will benefit in the long-term.”
When it gets down to it, Raingeard recommends four key considerations for planning your startup’s approach to financial compensation during the cost of living crisis:
1) Decide if you want to take action and think about it collectively with the leadership team.
2) Ensure the financial feasibility of those actions by using a tool such as Figures’ upcoming budget calculator feature, which will allow companies to forecast their next compensation review budget using inflation rates and real-time market data as inputs.
3) Communicate the decision to the wider company in a clear and concise way.
4) Find reliable market data to support your responses if challenged by your employees.
Get data-driven insights for your compensation strategy with Figures, an all-in-one compensation app for startups and scaleups.