2022 started on a cautiously optimistic note for construction, considering the planned influx of investments from the Infrastructure Investment and Jobs Act, backlog of jobs, and other indices. Then came the war in Ukraine, the gas crisis, and higher inflation, adding to challenges created by supply chain issues and labor. In the blink of an eye, some data that typically would guide a business for a year is changing much faster, making it vital to review important metrics with greater frequency so you can plan and respond appropriately. Take compensation as an example.
Compensation has become a hotter-than-normal topic thanks to employers’ responses to the Great Resignation and tight labor market, prompting businesses to review and adjust compensation budgets more frequently than in the past. With just a little more than four months left in 2022, no doubt benefits and compensation planning for 2023 is underway. Leaders may want to keep in mind what has happened with compensation over the last few years and plan accordingly.
WorldatWork’s 2021 – 2022 Salary Budget Survey results released in August 2021 projected an average 3.3% increase to salary budgets. A quick pulse survey conducted December 2021 to early January 2022, showed in the six months between surveys, companies actually made a bigger increase to salary budgets, coming in at an average of 4%. This shouldn’t come as a surprise considering 94% of survey respondents indicated it was very or somewhat difficult to attract and retain talent.
Pearl Meyers conducted a quick poll about 2022 base salary in November and December 2021 and found almost 50% of respondents expected 2022 base pay increases to be higher than what they expected earlier in the year (12% expected increases to be significantly higher). Mercer quick polls conducted in August and November 2021 revealed the percentage of employers planning increases of 3.5% or higher doubled. A Willis Towers Watson survey conducted in October and November 2021 found 32% of respondents increased salary projections from earlier in the year.
What does this mean to construction companies and their compensation plans for the year ahead? FMI, a consulting and investment banking company focused on engineering and construction, has been tracking compensation in the industry for two decades. In April of this year, FMI reported, “Average hourly wages for craftworkers, those considered production and nonsupervisory, climbed 6.2% from March 2021, according to the Bureau of Labor Statistics and the Associated General Contractors of America. This indicates that construction companies are paying more to attract workers and retain their current employees.”
In a Pay Practices Survey from February of this year, FMI found the average pay increase budgeted for 2022 was 4.6%. (Just one percent of survey respondents indicated they were not giving increases.) PAS, Inc’s Contractor Compensation Quarterly review issued in July shows average 2022 construction wages increasing 4.1%. However, there’s more to the story.
FMI reports that the U.S. Bureau of Labor Statistics tracks the overall employment cost index to measure changes in the price of labor in terms of employee compensation per hour of work. During the last quarter of 2021, employee compensation per hour of work increased 7.1% for private sector workers, but just 5.4% for construction workers. At the same time, the consumer price index increased 8.5% from April 2021 to April 2022. So, average construction pay increases aren’t keeping pace with other sectors or cost pressures in general.
To address this, many employers are evaluating merit and performance pay enhancements, offering one-time lump sum payments, providing bonuses, and/or enhancing benefits. While FMI indicates construction employers should plan for a 5% compensation budget increase in 2023, flexibility is required to ensure long-term affordability while keeping an eye on pay compression, equity, and compliance with fair pay regulations.
Considering U.S. Census Bureau data shows a decrease from May to June in spending on construction and the Associated Builders and Contractors report a backlog decline in July – that’s the second month in a row, more challenges lay ahead for construction businesses. Still, there’s more work than workers available, and certain parts of the country (like the Northeast and South) are experiencing backlog increases. While profit margins may be shrinking due to inflation and employee compensation increases, monitoring big picture financial landscapes, as well as compensation and other indices more frequently can help inform flexible decision-making during these tumultuous times.
If you need assistance with compensation planning, RBT CPAs’ Visions Human Resource Service Affiliate offers benefits and compensation analyses (along with a variety of other services). To free you up to focus on your compensation and benefits strategies, you can count on RBT CPAs to address all your accounting, tax, and auditing needs. Give us a call today.