Research

Global trends in pay: The old normal?

July 25, 2017
| Angola, Argentina, Azerbaijan +21 more
  • Brazil
  • Canada
  • China
  • Colombia
  • "Congo, the Democratic Republic of the"
  • Cyprus
  • Egypt
  • Germany
  • India
  • Ireland
  • Malawi
  • Mexico
  • Mozambique
  • Netherlands
  • Nigeria
  • Spain
  • Turkey
  • United States
  • Uruguay
  • Uzbekistan
  • "Venezuela, Bolivarian Republic of"

by Marco Poggetti

Last year when we looked at global salary trends we made a provocative statement and asked an even more challenging question: in a consistent low-inflation environment, does inflation still act as the key driver for salary increases? At the time, our conclusion was that inflation and salary budget planning, to a certain extent, de-coupled. Is it now time for a renewal of vows?

The world at a glance

Many economists and financial institutions are finally seeing the signs of a stable and generalised recovery. According to the IMF World Economic Outlook, investments, manufacturing, and trade are gathering momentum: world growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018 and both core and non-core consumer price index inflation are forecasted to once again rise in both advanced and emerging markets:

Figure 1. Advanced and emerging economies - IMF World Economic Outlook
Global trends in pay figure 1

This positive macro-economic outlook is also shared by the European Central Bank whose latest findings report an economic recovery in the Euro area that is projected to continue at a faster pace than previously expected. Both Gross Domestic Product (GDP) and inflation indexes are forecasted to grow over time: the expected global recovery will support the exports, while the very accommodative monetary policy and structural reforms across the EU27 will sustain domestic demand in the medium term.

Thus, it seems that the glooming days of the global recession have ended, at least until 2020, and the world can finally take a breath. But how will this impact salaries? Are organisations ready for this surge in inflation?

Europe, Middle East and Africa

When looking at the Europe, Middle East and Africa region as a whole, salaries have hit the lowest increase since 2010. Our latest issue (2017) of the Global Salary Budget Planning Survey reported an overall increase of 4.5% against an increase of 4.8% in 2016. Companies seem to have tightened their belts an extra notch as a reaction to and leveraging the prolonged low-inflation scene. But in the meantime, the unexpected surge in inflation has swiftly changed the background: with a round 5% inflation rate in 2017, the highest since 2010, + 0.9% against 2016, the employees in Europe, Middle East and Africa will see a decrease in their purchasing power in real terms by approximately 0.5%:

Figure 2. Purchasing power – Europe Middle East and Africa
Global trends in pay figure 2

The trend seems to be replicated across the different sub-regions. In Africa, the 2017 real wages are in negative territory: -3.2% against a -2.2% in 2016. Angola, Democratic Republic of Congo, Egypt, Malawi, Mozambique and Nigeria are the countries to watch closely with salaries eroded by an average of -11.3% due to the spike in inflation.

In Eastern Europe, real wages are forecasted to remain substantially flat (+0.1%) against a +1.4% in 2016, and despite a fairly balanced overall picture, employees in Uzbekistan (-11.2%), Azerbaijan (-4.2%), Moldova (-2.4%) and Turkey (-1.7%), will be the most impacted and see a decrease in purchasing power.

In contrast, employees in the Middle East will still see their salaries increase against inflation by 1.3%, however, our figures show that this will be the lowest real increase since 2010 and rather far from the +4% in 2015.

Also Western Europe seems to have realigned to the region: from 2012 onwards, workers have enjoyed substantial real increases due to a prolonged period of falling inflation and, in the face of salary increases of 2.4% in 2016 and 2017, employees will see their purchasing power shrinking as an effect of the rise in inflation, which now almost matches the ECB target of 2%. However, the picture seems to be different depending on the various markets: Irish, Cypriot, Danish and German employees will still see their real wages increase by more than 1% as opposed to their Spanish and British colleagues whose Salary increase will be completely eroded by the surge in the cost of living.

North America

Employers in the United States and in Canada have historically remained cautious about budgeting pay increases: gross numbers haven’t substantially moved for the past five years and the 2017 median figures do not constitute an exception to this trend. Regardless of a rise in inflation of 0.7% in Canada and 1.2% in the US, organisations will confirm the 3% overall increase they have allocated since 2013. However, employers continue to reward their best performers with significantly larger pay raises as they struggle to retain top-performing talent in a tightening labour market. This trend seems to be testified by a prolonged and generalised increase in merit budgets as a clear effort to segment the workforce population and reward more the so-called hot skills and key talent.

Asia Pacific

With gross salary increases at 5.9% across the region, 2017 is the third consecutive year of salary increase budgets declining across the region. Organisations seem to continue to walk down the path of reducing costs in response to a broader economic environment in which the Asia Pacific’s contribution to the world is forecasted to shrink, as both the Chinese and Indian economies experience a slower pace compared to previous years.

Focusing on salary trends, the region as a whole experiences a drop in salary increases in 8 out of 21 Asian countries with the other 13 remaining substantially flat. Among these, employees in China and India will see their real wages rise by respectively 4.7% and 5.6% in line with the 4.9% and 5.1% of 2016. However, organizations in all Asian markets are forecasted to spend a higher proportion of their salary budgets on top performers as the salary increase allocation for over-achieving employees will increase from 37.6% in 2016 to 38.2% in 2017. There is no doubt that the war for highly-skilled talents continues to challenge organisations even in this region and many companies are expected to bet on the power of cash to help persuade their human assets from leaving: after all, pay remains the number one driver for attraction and retention across the world and Asia Pacific is not the exception that proves the rule.

Latin America

In line with Europe, Middle East and Africa and Asia Pacific, Latin American salaries (excluding Venezuela) have hit the lowest increase in seven years: with a reported overall salary increase of 5.8%, the 2017 gross budgets will be the lowest since 2010. Despite this, 2017 real salaries will be higher than in 2011, 2014 and 2016 mostly due to inflation decreasing in the region: employees in Argentina (-18.9%), Colombia (-2.8%), Brazil (-2%) and Uruguay (-1.7%) will see their cost of living alleviated by a lower inflation, whereas their counterparts in Mexico (+2.5%) will see their purchasing power reduced by a surge in the opposite direction.

In Venezuela, inflation has gone up from 104.1% in 2015 to 652.1% in 2017 and workers have not benefited from real increases since 2012: there are elements that fall outside what organisations can predict and although companies can try to protect their workforce, the space of action is limited when inflation is forecasted to pass the 2000% mark. HR professionals will never be able to control the macro-economic factors that affect salaries, but can learn how to react in an increasingly changing world: Venezuela, and to some extent Argentina, remind us that one size doesn’t fit all and that budgeting differentiation, both from a talent and geographical perspective, remains a key competitive advantage for local and global companies.

Conclusions

The economic forces have handed us a post-crisis world in which low-inflation scenarios were considered the norm, a new normal, and the first half of 2010s has shown that gross budgets don’t directly react to year-on-year inflationary movements unless acute (Latin America). Some markets (predominantly in Western Europe, North America, Asia Pacific) have highlighted that employers now treat salary budgeting and inflation as two separate matters and that the cause-effect relationship between wages and inflation has lost its power.

Will the new surge in inflation levels change this modus operandi? We will find out. However, no matter the economy, companies will always need to react to inflationary pressures to protect their workforce and if the period of falling inflation has presented an opportunity to re-think the salary budgeting strategy and segment employees, granting more to top performers and key talent and less to the rest of the staff by taking advantage of a lower inflation economy, how will organisations allocate a fair share to all now and at the same time adequately reward over-achievers and their talents? Will employers increase their overall salary budgets or focus even more on ‘Tier-1’ jobs and employees? The cost of living may well not act as the key driver for salary budgeting anymore, but a link between salary increases and inflation is still there: they may continue to be de-coupled, but will always dance together.