The past few years have provided practical – if unwanted – experience for many HR professionals and business executives on how to respond to the pressures of elevated inflation rates. And though inflation has calmed in most places in the world, many markets will face a surge or continuation of high inflation. This will require a targeted and timely response from both regional and global headquarters.
Inflation is personal. People see and feel the hike in prices of groceries, energy bills and higher interest rates. Besides making the daily cost of living visibly higher, inflation often results in a decrease in real incomes and an erosion of savings. Inflation triggers a string of challenging discussions in boardrooms, HR offices and union meetings as well as the dinner table at home.
Internationally, inflation in the past 20 years has ranged from -73% in Zimbabwe in 2007 to 65,000% in Venezuela in 2018. If we ignore these very low and very high inflation rates, for the past two decades the remaining 80% of markets have seen an inflation range of between zero and 18%.
This is a much wider range than the assumed low, single-digit inflation to which headquarters locations in G20 countries became accustomed. Despite much attention, global inflation levels from 2021 to 2023 did not deviate from that zero to 18% range — even if many economies uncomfortably moved toward the middle or even higher end of that range.
In 2024, 12 countries experienced inflation of more than 25%. More than 46 countries will see inflation at or above 6% in 2024, which typically is considered high by Western standards. Such levels of inflation were seen before the COVID-19 pandemic and are very likely to be around for the next five, 10 or 20 years.
In memory of the 1920s and 1970s, Western economies perceive inflation growth of more than 2% as a risk. For many emerging markets, elevated inflation comes naturally, accompanying their economic transitions and growth. If you try to curb inflation, you risk destroying desired growth. And the fact is, inflation can present new opportunities for business.
46+ countries will see inflation at or above 6% in 2024
Surges in inflation often are associated with higher nominal salary budgets, which allow us to more effectively re-price the relative salaries paid for jobs and skills. At the other end of the spectrum, a nominally low salary budget increase limits the opportunity for differentiation. Manageable inflation levels should be welcomed by business leaders who want to optimize the value of their human capital!
The absolute level of inflation doesn’t trigger unease; rather, it’s the deviation from a specific market norm. Eight percent to 12% inflation does not create any steer in a country running consistently at 10% inflation. However, bring 10% inflation to a country that is used to 2%, and CEOs, CFOs and CHROs are all busy analyzing the impact and agreeing on how to respond.
This extra tension often arises between the global leadership sitting in an unaffected country and the subsidiary that is exposed to the inflationary environment. Local leadership often challenges headquarters about actual versus reported inflation, employee retention risks and slow decision making at headquarters to support local operations.
There is no simple, single answer for managing pay in volatile environments. Following are a few actions that successful companies often take.
01
Inflation headlines often divert focus away from pay competitiveness in a futile attempt to match inflation levels. However, inflation does not necessarily require pay adjustments — unless market pay levels move. An over-emphasis on inflation raises the risk of establishing long-term employee expectations about salary-increase entitlements, making subsequent periods of high inflation even harder to manage (not to mention the related costs for the company).
While you can’t avoid the inflation discussion altogether, you can avoid attempting to establish the actual level of inflation, as multiple sources will likely provide conflicting answers. Rather, appreciate the range of available references and focus on understanding the trend; how likely is it that this elevated inflation will continue or drop in the near future?
02
While often a challenge on its own, understanding market trends is key to making sound pay decisions. Establish a regular feed of fresh market-pay data and trend updates to your compensation and benefits team, especially those in volatile markets.
In high-inflation environments, this often means more frequent-than-annual updates. Leverage your existing survey providers, professional associations and, as needed, consider initiating custom studies in markets with limited official data sources (or where the situation is evolving rapidly) to ensure you have access to reliable market data and trends.
Similarly, as the market evolves, regularly check your overall pay competitiveness against your desired target position as well as your individual pay package elements. Too many companies are eager to compensate based on inflation, setting themselves up for a surprise in a few years when they realize they are paying significantly above the market.
03
Pay management responses should be guided by how sudden or persistent inflation is. Some of the most common and effective pay responses include:
The situation is different in markets with a history of chronically high inflation and few expectations for substantial decreases in the foreseeable future. Several options come into play in these situations, depending on the actual level of inflation:
Organization size, financial position, existing talent challenges, local legislature and union agreements all play critical roles in selecting the most appropriate intervention. And even the best intervention will not succeed without engagement from key stakeholders.
04
There are several practices for headquarters locations to follow to limit unproductive tension with subsidiaries in high-inflation markets.
Many business leaders and HR professionals have gained firsthand experience in the past three years on how to handle pay in the context of inflation surges. Now is the best time for headquarters locations to reflect on the lessons learned and update their guidelines to handle the next inflation surge.
If you are responsible for emerging markets, there is a good chance that one of the mid-size markets with high GDP growth will scream inflation just as your leadership expects strong business expansion and operational stability. Now is the time to get ready.
