Inflation on the Responsibilities of the Board
The phenomenon of inflation warps myriads of aspects of corporate life, and perhaps most significantly the task of the compensation committee. As prices across the board skyrocket, budgets must be increased and compensation packages must be reevaluated.
In the current inflationary economy boards must advise based on the level and rate of inflation that the economy is suffering. As the prices for goods and services rise unchecked, wages across the country must be raised to meet expenses in order to maintain a healthy business and workplace. Boards must be prepared to react appropriately to such discrepancies in national economic health or risk disrupting the productivity of their company.
Most companies approve incentive plan targets within the first quarter of the year, so now is the time to consider how inflation will impact this year’s salary increases. Merit budgets had been at a steady three percent for the last 10 years or so; however, in 2022, the delivered merit budget increased to 3.4%, and for 2023 it is projected to be at 3.8%. This is crucial for board directors to consider when drafting incentive plans and advising for compensation packages. While it may be tempting to simply increase incentive opportunities, incentive plans can be riskier during inflationary periods and so smaller salary raises may be wiser. Slight complexities such as this pose opportunities for an inattentive board to misadvise and cause company decline during these times, but, as always, precarious moments also provide opportunities to succeed beyond competitors. As a board director it is important to recognize those moments when slightly more effort and communication may result in an advantageous level of preparedness.
During the times of uncertainty that multiple years of a pandemic have created it can be tempting to try and deduce certainty out of supply chain statistics and changing product value, but current supply chains are too intricate to be reliable. Incentive plans must be generated in response to the current economy, which is inflationary.
Today, supply chains are far too complex to predict the results of incentive plans or goals, which introduces the necessity of a well-informed financial director. This is one of the board’s primary jobs, for which it is vital to evaluate current economic data and draw judgements based on the best interest of the company. In sum, a good board consists of directors who take stock of the current economic environment and its quirks, for example inflation, and advise in response to it and in redistributing incentive plans and payouts.