4 minute read 21 Nov 2022
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What are the impacts of the currently high inflation rates on employee compensation?

By Christoph Thoma

Partner, Organisation & Workforce Transformation Leader | EY Switzerland

Building a better working world by helping clients to improve the impact of talent management, leadership, culture, people strategy and organizational transformation for the business.

4 minute read 21 Nov 2022
Related topics Workforce

With rising inflation levels combined with the global cost of living crisis, companies are once more faced with the challenge of how to react as employers providing wage income to their employees. Discussing alternative actions and, ultimately, finding sustainable solutions that do justice to the extraordinary situation are mission critical.

In brief
  • High inflation rates are a global topic but vary across the world and even within Europe to a great extent
  • Other factors such as COVID-19, global cost of living crisis and energy crisis already put pressure on employees’ compensation levels
  • Companies should now ensure to find the best possible action plan for their situation

The world is changing and is has not stopped doing so: just when employers and employees are about to recover from the impacts of the COVID-19 pandemic on work life, inflation rates are rising everywhere. The general cost of living crisis, fueled by energy resources changing, is already on the agenda of most employers. Now we can add inflation to any company’s agenda– not only in terms of production and sales, but also with regards to rewarding employees.

Setting the scene – inflation levels and regulation

Inflation has been one of the hot topics across the world for the last months. Compared to the previous year’s month of October, many markets record inflation rates beyond 10% (e.g., Germany: 10.4%, UK: 11.1%, Netherlands: 17.1%). Apart from such a trend being alarming with regards to the global pricing dynamics, it largely impacts costs of living and real wages for any employee. Even though Switzerland’s inflation rate lies much lower at approx. 3.5%, there seems no way around discussing it in the media. Unions demand salary increases and employees consider going on strike (for example Swiss Airlines) to emphasize, among others, the need for compensation of the higher cost of living.

While for employees with public law employment relationships a legal entitlement for inflation compensation exists, there is no such requirement for private law relationships. The market shows that employees demand their employers to take measures against this issue. In addition, taking action might be a differentiator in winning the war for scarce talent – doing nothing as an employer cannot be the answer.

Considering the different elements of employee remuneration inflation does not only have an impact on current fixed pay. Employees also worry about the value of any potential variable remuneration that is settled in cash and, additionally, deferred over a certain period.

Market observations on potential actions

There are numerous measures employers are currently considering to compensate for high inflation rates.

While the most obvious idea to match the planned salary increase of their workforce with the local inflation levels is, firstly, not sustainable and, secondly, very costly; other actions require an analysis of the company’s specifics. Depending on the industry and financial situation, which might still be impacted by COVID-19, the main requirement when taking action might be cost control. Generally, any salary increase now will not only affect this and next year’s profit & loss statement regarding personnel expenses, but also impact any year going forward since salaries, usually, do not get reduced. Some might even argue that over the past years, when inflation was low or even negative, salaries were not reduced either.

Some companies are contemplating a one-off payment for their entire workforce to counteract high costs of living, making clear that there is no entitlement to receive the same again next year.

Considering that the part of the workforce receiving the lowest remuneration levels feels most pressured due to high inflation rates and increasing prices, employers might choose to only target those employees when establishing higher salary increases or one-off payments. Well-managed communication is key when such selective measures are taken across the company.

Another factor to consider is the pressure on attracting and retaining talent due to scarcity of skilled workforce depending on the job profile. Analyzing a company’s key people and structuring retention instruments for them specifically might be one way to win the war for talent in light of the current market dynamics.

Sources:

Statista 2022 on inflation levels; SRF News (24.10.22; “Streik abgewendet: Swiss und Piloten einigen sich»); destatis.de (Statistisches Bundesamt)

Summary

There is no one-size-fits-all approach to handling currently high inflation rates. While there are usually no obligations to increase compensation levels, employers are put on the spot to react in one or the other way.

 Acknowledgements

We thank Corinna Ast for her valuable contributions to this article.

About this article

By Christoph Thoma

Partner, Organisation & Workforce Transformation Leader | EY Switzerland

Building a better working world by helping clients to improve the impact of talent management, leadership, culture, people strategy and organizational transformation for the business.

Related topics Workforce