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Survey Report

The inflation-employment-salaries tussle is fascinating but it may be a distraction


October 10, 2018

The our latest report shows budget increases for 2019 and 2018, alongside trends.

Recent economic forecasts from the IMF, OECD et al. contain alarm bells for those with nervous dispositions. Whilst the headline forecasts of 3.9% or 4% global growth for 2018 and 2019 seem cheery, the IMF’s World Economic Outlook (July 2018) points to uneven growth prospects, escalating trade tensions, rising oil prices and some emerging markets and developing economies being under pressure.

All this highlights various instabilities in the global economic landscape. Yet when we look at the outlook for salary budgets, the global picture is one of continuity, with the Willis Towers Watson Salary Budget Planning Report (2018 Q3) showing budget increases for 2019 being broadly similar to 2018 be it with some country exceptions. Employers should be able to keep pay competitive, and provide good value to employees.

So how does this fit with previous discussions around salary budgeting de-coupling from traditional drivers such as inflation and unemployment? The picture from the data is mixed – both in terms of gross and real salary budget increases, and what may be driving employers’ decision-making.

Europe, Middle East and Africa

Overall, the forecast data for 2019 for Europe, Middle East and Africa is in line with 2018 data – with regional salary budgets up 4.9% in both years. Though individual sub-regions don’t all share the 4.9% figure for 2019, they do all forecast broadly the same level of budget increase as they saw in 2018.

Real wage increases are also forecast to be similar in 2019 to what they are in 2018, in most sub-regions. In Western Europe, for instance, we have a real wage increase of 0.9% in 2019 versus 1% in 2018. In the Middle East, the real wage rise in 2019 is very slightly higher: +1.8% in 2019 versus +1.6% in 2018.

In Africa, there’s an approximate parity between budget increases and inflation (though not in Egypt where a median salary increase of 12.2% will be wiped out by an expected inflation rate of well over 15%. This, however, is a better picture than 2018 when salary budget increases lagged inflation by 5.7%).

And spare a thought too for much of Eastern and Central Europe, where increases will be almost completely eroded by inflation. In contrast, Ukraine, Kazakhstan and Romania will have higher real wages due to inflation softening.

Markets to watch in EMEA include the UK and Turkey. In the former, lower inflationary pressures and higher gross and real increases are expected in 2019 compared to 2018. But behind this positive-sounding scenario, there are sharp debates in the UK about pay. A recent report by a commission of influential figures from business, finance, academia and the church called for higher wages. And of course, uncertainties around Brexit are muddying the waters in economic and business forecasting.

In Turkey in 2018, the Turkish lira devaluated 82% against the US dollar and 72% against the Euro. So, while actual and projected salary budget increases in Turkey have historically shown less volatility than inflation, these adverse indicators will likely affect how organisations administer salary review practices and react to high inflationary pressures. The Salary Budget Data show median salary increases of 9% in 2019 being more than eroded by an inflation rate of 10.5% - but it will be interesting to see how the year unfolds, with April being the most prevalent salary review month in Turkey.

Asia Pacific

There’s a gentle upward trend in salary budgets in Asia Pacific, with increases rebounding from 5.6% in 2017, to 5.7% in 2018 to an expected 5.9% in 2019. In nine out of 17 markets in the region (Bangladesh, China, Japan, Pakistan, Philippines, South Korea, Taiwan, Thailand and Vietnam) salary increases are expected to be 0.5% to 1% higher than in 2018; the figures for other countries are flatter.

Despite a generally stable outlook in APAC, only 27% of organisations plan to add headcount in the next 12-24 months (compare this to 39% in 2017 Q1). This caution reflects not so much the macroeconomic outlook, but automation, the drive for efficiency, and organisations looking to review job design and skills required – ie factors beyond the traditional macro-economic couplings.

North America

Across the Pacific, wage increases are more sedate, with a forecast budget increase of 3% for the second year in a . This is against a forecast inflation rate of 2.4% in the US and 2% in Canada.

Low real wage growth in the US is a continuing source of puzzlement and irritation for many economists. With unemployment low, economic theory would suggest higher wage growth should be on the cards. Various theories are flying around including workers’ fear of downsizing preventing them from pushing for wage increases.

Our own data on the US shows salary policies are increasingly targeted. For example, those rated as ‘above-average’ performers typically receive salary increases averaging 70% higher than those with an ‘average’ rating.

Merit increases continue to rise in the US for most employee groups, with projected increases for 2019 higher than what was budgeted for 2018. An increase in discretionary bonus awards in expected in 2019 across most employee groups.

Similar patterns are evident in Canada where we’re seeing the employees achieving the highest-possible performance rating receiving base salary increases nearly double that received by employees rated ‘average’.

Latin America

The headline forecasted average salary increase for 2019 is 5.5% (excluding Venezuela) - the same as in 2018. But of course averages can only tell you so much.

Chile, Peru and Colombia, with relatively stable inflation rates, will be broadly in line with 2018 – with overall salary increases in the 4.5 to 5.5% range, and inflation around 2.5% to 3% in 2019.

But Brazil, with presidential elections in October, and Mexico, with a volatile political and economic environment, are both seen as vulnerable to inflation rises. Argentina saw the forecast 18% rate of inflation spike to 30% this summer, and a WTW pulse survey saw that over half of companies modified their 2018 salary increase budgets, resulting in a median salary increase of 25.4%. With economic challenges continuing to beset the country, Argentina has to be considered an outlier to any trend, and it’s too soon to see what happens with the budgeted 22% 2019 increases.

And talking of outliers, there’s Venezuela, with 12,600% projected inflation in 2018. Not surprisingly, few companies have firmed up their plans for 2019.

What’s next?

With 103 countries included in the Salary Budget Planning Report, there’s not space to look at every trend, counter-trend or outlier. But it does seem there’s an over-arching narrative.

Chapter one of this narrative is the macro story - that it’s not just economists in the US who are perplexed by wage data. The traditional tussle between inflation, unemployment and salaries remains a looser alliance than the one described in economics textbooks. A variety of reasons – labour market slack, global supply chain, the Fourth Industrial Revolution– could be interfering with the economic theories.

And chapter two is what’s happening beyond the macroeconomic charts and in the business data. Some of the trends  mentioned here - headcount caution in APAC, rewards differentiation globally – and much else in our data reflect the challenges highlighted in our 2018 Getting Compensation Right Survey. From technology to regulatory changes to culture, these challenges are influencing talent and rewards practices all round the world, and employers will need to look hard at what they do.

Base pay programmes, in particular, have to come under the microscope, with only 40% of organisations convinced that base salary increases are effective at driving higher individual performance. So whatever the story around the puzzle (or otherwise) of 20th-century economic theory and the inflation-unemployment-salaries connection, the imperative for businesses in every country is to make better use of their budgets.

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