Rising inflation: options for companies

 

Rising inflation: How do employers plan their salary budgets? What are the advantages and disadvantages of possible measures?

 

At the moment, inflation is undoubtedly one of the economic indicators most often discussed in the media and in daily life. In many countries around the world, inflation is reaching levels that the national economies have not seen for 30 or 40 years. Rising prices are a challenge not only for ordinary consumers, but also for businesses and the state. Because of rising prices, workers are demanding compensation for the loss of purchasing power, i.e. a salary increase. In the following, we present measures available to (international) corporations.

 

Current inflation rates - differences between sources

 

International groups need a reliable source of inflation forecasts. One possible source is the local statistical offices, although the differences in the calculation formulas mean that the inflation rates calculated are not internationally comparable. An alternative basis is provided by international organisations or industry portals that publish inflation rates.

 

Significant differences in the inflation rates reported by the various institutions undoubtedly pose a challenge for international corporations and make it difficult to plan salary increases. In the case of Germany, for example, the difference is at least two percentage points between IMF and OECD.

 

One possible solution is to use the indices provided by international institutions such as the International Monetary Fund and to apply an index that refers to the complete business year. In this way, it is possible to synchronise corporate planning with the salary increase budget.

 

Possible responses to rising inflation

 

In the face of rising inflation, companies need to answer the fundamental question of whether and how to respond to inflation. The answer to this question may vary depending on whether one views high inflation as a temporary or permanent phenomenon. Below we present four possible scenarios on how companies can respond:

 

Scenario 1: Do nothing

 

The simplest solution would be to take no action in the face of current inflation rates. This scenario is likely to be favoured by those companies that see rising inflation as only a temporary problem. The reason for this scenario could also be that in most countries around the world, salary increases have outpaced inflation in recent years (see Figure 2), so workers will accept a temporary reduction in purchasing power.

 

A Mercer survey in early 2022 showed that the majority of multinationals do not plan to increase their budgets for wage increases. They accept that salary increases will be below inflation.

 

Scenario 2: Increase in basic salary

 

The second possible solution is to increase basic salaries by at least the rate of inflation. This approach is undoubtedly in line with workers' expectations, but it is not without drawbacks: An increase in basic salary also often leads to an increase in other salary components (for example, bonuses set as a percentage of basic salary or contributions to occupational pension plans). The application of this scenario therefore permanently increases the company's personnel costs. Moreover, it affects the expectations of employees and can also stimulate the inflationary spiral, which is a dangerous phenomenon from an economic point of view.

 

Scenario 3: One-time payment

 

One-off payments are an alternative to salary increases. This solution has been used in the past by multinationals in countries where a temporary increase in prices or currency devaluation led to a temporary increase in the cost of living. One-off payments have the advantage that they do not create an entitlement to the future compensation payments and can also be excluded from the assessment basis for bonuses or other additional benefits.

 

Scenario 4: Payment of targeted allowances or fringe benefits

 

One-off payments may be effective if the price increase is temporary and does not imply a permanent loss of purchasing power. If high inflation persists over a longer period, an alternative to increasing the basic salary may be to introduce an inflation supplement to the salary package. Like the one-off payment, this is not included in the calculation of the premium or the occupational pension contributions. The inflation surcharge can also take the form of additional benefits such as meal vouchers or prepaid cards.

 

When companies consider a possible response scenario, it is important to understand the dynamics and main drivers of inflation. In most European countries, price increases are due to supply shortages and fuel price increases. Therefore, an alternative to increasing the basic salary could be to revise company car schemes, for example to allow private car use, to allow working from home or to offer employees a job ticket.

 

Conclusion

 

Rising inflation rates are currently one of the most important challenges for international corporations. When making the final decision, the possibility of taking different measures for different target groups (countries and/or employee groups) should also be considered. In this difficult situation, it is particularly important to support employees who belong to the low-income group, as they are most affected by rising prices.