Pay increases outpacing inflation

Numbers put performance, productivity in the spotlight as employers strive for more bang for the buck
By Danielle Harder
|Canadian HR Reporter|Last Updated: 12/13/2007

Wages worldwide are expected to rise by six per cent — almost two percentage points above inflation — in the coming year, according to a new study by Mercer Human Resource Consulting.

The

2008 Worldwide Pay Survey

looked at forecasted inflation and forecasted average pay increases in 62 countries.

It found the sharpest changes are in emerging markets, particularly India, where wages are forecast to rise by 14.1 per cent, nearly 10 percentage points above local inflation.

By contrast, Canada will see modest wage increases, at 3.8 per cent or 1.8 percentage points above inflation.

Traditionally the difference between wage increases and inflation has been in the order of one percentage point, said Iain Morris, a principal with Mercer. However, he’s not surprised by the more substantial increase predicted for 2008 for Canada.

“Part of that is being driven by what’s happening in Western Canada,” he said. “But I think, broadly, it means we have to put a tremendous focus on productivity and focus on performance and making sure people are doing the right thing and doing it as effectively as possible.”

As wages outpace inflation, organizations will have to expect more from employees, Morris said.

“If you don’t get productivity gains or you don’t improve performance over time, it really does put tremendous pressure on the organization,” he said.

At the same time, organizations feeling pressure will have to think beyond wages, a trend that’s already underway, said Morris.

“Most companies are looking at virtually all aspects of their total rewards package” to see where they can reduce costs and where they can invest to get the most value, he said.

Many employers are already focusing more on career opportunities, training and development and personal growth, said Morris.

“Those things are all certainly not free to do, but it’s something that a lot of organizations have invested in in the past — and hadn’t really communicated the value of that to employees,” he said. “But you can get a lot of leverage out of looking at your career-development plans and processes.”

With predictions of an impending “sellers’ market” for labour — and labour costs outpacing inflation — good communication will become the most effective HR tool, said Morris.

“At the end of the day, if all you could afford to spend was $100 per employee on something related to rewards, if you spent $100 on communication you’re likely to get a bigger bang for your buck than you would giving every employee $100,” he said.

The Mercer study has also revealed some potential problems with hiring people in emerging markets. Some firms in the United States are repatriating jobs from markets, such as India, partly in response to skyrocketing inflation and labour costs and partly due to long-distance language barriers and issues with customer perception, said Morris.

However, he doubts that will happen in Canada in the short term.

“The absolute wages in India are still quite low compared to Canada,” he says. “It’s going to take some time, even with very different inflation rates, to totally erode the dollar benefit.”

However, those savings may deteriorate over time, said Steve Gross, worldwide partner and global head of broad-based performance and rewards consulting at Mercer.

“Some multinational companies are experiencing labour-cost savings of 75 per cent by sourcing labour from emerging markets,” he said. “On the flip side, they generally need to invest more in employing supervisory staff and in training.”

The study suggests salary increases in the U.S. and Western Europe will be only slightly above those in Canada.

Danielle Harder is a Whitby, Ont.-based freelance writer.

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