Article

The world in 2017: What employers should be looking at

Latest findings from the Global 50 Remunerations Planning Report can help corporates ask the right questions

March 23, 2017

by Darryl Davis

There is nothing like a graph for taking the drama out of a situation. Looking at the long-term trends for key economic data over the past 20 years, and the world appears to be in a period of relative serenity. However there is not a one size fits all approach to the world, as will increasingly be seen in this article employers sometimes need to look globally to find comparator markets.

The rollercoaster ride of 2008-10 has been left behind for something more akin to a sedate daytrip on a steam train (see Figure 1). The global economy is growing more slowly than it did 20 years ago, with the heady 3.20% GDP growth rate of 1996 replaced by a more restrained 2.20%.

Figure 1. A world that’s growing slower, colder, older

Figure 1: A world that’s growing slower, colder, older

Meanwhile, the annual rate of inflation has cooled to 3.90%, and population growth has decelerated from a rate of 1.4% pa to 1%. Everything appears calm and controlled compared to the picture 20 years ago when the Global 50 Remuneration Planning Report was first launched.

Yet, the smooth surface of a long-term graph can obscure what lies beneath. In fact, looking more closely at individual economies, there is the emergence of some more lurid figures.

Look at inflation and the figures for the 60 countries included in the G50. Among the major economies covered by the report, 12 are expecting the Consumer Prices Index (CPI) to be in negative territory in 2016, with Romania down at the bottom at minus 1.5%.

Meanwhile Venezuela has an inflation rate estimated at anything from 450% to 700+%, and there are newspaper reports of shopkeepers in the capital Caracas weighing piles of banknotes rather than counting them. An extreme case, of course, but five other countries are also projected to have a CPI in double digits in 2016, according to the G50 data.

Far from being cooler, slower and more monotone, the global picture is showing increasing degrees of polarisation. The geopolitics of 2016, the political surprises and events of the year, and their ramifications in 2017, will do little to quell this.

Salary trends

No remuneration planning report is complete without some updates on salary increases – it’s often the first question we’re asked about, and naturally a key part of corporate planning.

The G50 Remuneration Planning Report shows global median salary increases budgeted at 4.8% in 2016-17. But the median real salary increase is budgeted at 2.3% - , much of the increase in the first figure is due to dynamic inflation rather than dynamic movement in company budgets. Real salary increase is defined as the percentage above inflation that a salary increases by.

In other words, much of the global real salary increase comes down to an element that employers can’t control. One consequence is that, despite the wish of corporates to simplify and align their rewards strategies across regions and globally, a good deal of localization and adaptation is required.

Using data in a non-uniform world

Heterogeneity can make patterns hard to spot. When you have data as rich as the G50, and when that data can show extremes such as inflation stretching from minus 1.5% to over 400%, the information can be dazzling. This makes the patterns and trends, once spotted, all the more valuable in remuneration planning.

As a general rule, companies like to base their remuneration planning on recent and robust information. Understandably so. But in developing economies especially, that information may not be available: data from previous years may be lacking or irrelevant; neighbouring countries may be at different stages of economic development or have entirely different employment practices, so offer little assistance in planning.

This is where publications like the G50 Remuneration Planning Report come into their own, providing the high-level data that allows companies to identify that country X behaves in similar fashion to country Y – despite its being in a different continent and far from obvious as a comparator.

Identifying these comparators can be immensely helpful for companies, enabling them to ask the right questions and study different options for plans and programmes. This aspect of the G50 is perhaps underused by companies, but is valuable in a polarised and fast-changing world.

The value of cash is not straightforward

A second consequence of inflation being the dynamic element in salary increases in 2016-17 is that cash increases and cash costs retain their prominence in employers’ and employees’ thinking – especially when inflation is showing signs of bounciness in a number of countries and regions.

And cash is a very nuanced thing. The differences to be seen in gross base salary, net base salary, and total guaranteed compensation can be significant, and even more so when purchasing power parity (PPP) adjustments are taken into account. ‘Highly paid’ and ‘well paid’ are not necessarily the same thing, as can be seen in Figure 2. As the examples of Switzerland, Denmark, Japan and China illustrate, taking PPP into account can dramatically reduce the value of cash remuneration.

Figure 2. ‘Highly paid’ and ‘well paid’ are not always the same thing

Figure 2: Highly paid and well paid are not always the same thing

In this respect, the use of Switzerland as an example is unlikely to be a surprise for most people. But China? Perhaps so.

People often tend to have preconceived notions of PPP, of good value, and of labour costs in a particular market, and of what it entails to be an employer there. The full picture is often different or more complicated, as the Inter-country Relative Wealth Comparisons in the G50 Report illustrates.

Cash comes at different times

Another interesting nuance on cash, revealed in the G50 Remuneration Planning Report, is the rate at which professionals start earning it in different economies. In Figure 3, the purple bars show the typical base salary for an entry-level professional; the yellow area shows the typical % increase from entry-level to middle management - that is, how quickly people’s base salary escalates as they advance through their career.

Figure 3. There’s no one-size-fits-all design for the corporate ladder

Figure 3: There’s no one-size-fits-all design for the corporate ladder

There turns out to be a broad relation between the two: where people start on a lower salary, their pay tends to ramp up more steeply. Furthermore, there is a broad relationship (with some exceptions) between being a developing economy and having a start-low-rise-sharply salary pattern.

It’s an interesting pattern, and certainly useful for employers to consider in their planning, but there is also likely to be a more complex story here, not entirely evident from the graph itself. Namely even though salaries may advance at a slower rate in many developed economies, the benefits may come in other ways - for example, through various benefit plans which fortify the employee’s total reward package.

In contrast, in many developing economies, there may not be the vehicles and frameworks to provide these benefits in tax-efficient ways. Therefore, the only – or preferred – form of reward is cash. The patterns shown in Figure 3 are fascinating, but the detail will differ from market to market.

What else employers need to know in 2017

The example of pay progression, above, highlights the importance of back stories and - this word, again – nuance in global remuneration planning. Even beyond the figures on intercountry wealth and the importance of PPP adjustments, the G50 Report tells us about other matters to be taken account in employers’ planning in 2017:

  • How much autonomy do employers have? Is the employment environment so governed by statute, collective agreements or tax arrangements that employers are constrained in terms of remuneration? Or can they be creative in terms of how they reward people and differentiate themselves as employers?
  • What functions are hard to fill in a particular market, and how are the rates of attrition across different jobs?
  • What is the ease and cost of terminating staff, and what are the statutory costs and notifications involved in different markets?
  • Given factors such as those above, and the different statutory or customary benefits arrangements in different countries, what might be the total cost of being an employer be?

No company is going to base its HR programme on those questions; nevertheless, they can be game-changing for the smooth running of a company’s operations in a particular country. Globalisation can lead companies to underestimate the diversity of national markets; as the G50 underlines, the world in 2017 will not be as uniform as the headline figures and graphs may suggest. It’s the underlying data that employers need for their planning.