Article: The state of the economy and of employee pay

Compensation & Benefits

The state of the economy and of employee pay

As pay trends prove a dampener, organizations must take a holistic look at their rewards practices to attract and engage top talent, and therein, sustain high performance.
The state of the economy and of employee pay

As we move into the next decade, the international economic order continues to create turmoil. The post-World War II economic architecture which fostered global prosperity and sustained economic growth, no longer stands true. Its potential demise would herald weaker long-term prospects for the global economy. Gone are the days of double-digit growth figures, the 2018 global deceleration shall continue to carry on through 2019 and into 2020, having a direct impact on people and organizations. Organizations, squeezed by profitability constraints on one hand, and rising costs on the other hand, are course-correcting. With people being a significant cost outflow, the grim prospects are forcing organizations to rethink their talent and rewards strategies, which are not only more cost effective, but also more performance-effective. 

The Relationship: Macroeconomics and Pay

The economic environment has a direct and significant impact on labour norms, such as salary trends. Many economic concepts have been conceptualized. A case in point is the concept of “Wage push inflation***”, which indicates an overall rise in the cost of goods, resulting from a rise in wages. Essentially, to maintain corporate profits after an increase in wages, employers must increase the prices they charge for the goods and services they provide. Naturally, the relationship between macroeconomics and salaries in today’s multi-dimensional business environment is not as straightforward, and any salary predictions requires a deep-dive into the economic and business landscapes. Only then can corporations understand and offer the right remuneration for specific skills, roles and levels. 

Macroeconomic Factors in 2019

Global economic activity continued to soften at the start of 2019, with global growth projections in 2019 downgraded to 2.6 percent, (0.3 percentage point below previous forecasts). This is on the premise of weaker-than- expected international trade and investment at the start of the 2019. Particularly, global trade growth in 2019 has been downgraded by a full percentage point, to 2.6 percent, the weakest since the global financial crisis. Emerging market and developing economies (EMDEs) continued to be impacted throughout 2019 by subdued investments and high debt, whereas the major economies continued to fluster under the weight of trade tensions and regulatory and policy uncertainties. All these have spiralled down into a loss of confidence, leading to enterprises taking an air of caution in business and people decision-making. 

Salary Trends of 2019

The above macroeconomic environments naturally translated to a dim salary outlook. In 2019, the salary growth rate was 5.1 percent. With global inflation at 4.1 percent, that meant 2019 real-wage salary increases across the globe were only 1.0 percent. 

Yet, a distinction is seen in the shift in which these salaries are being paid out. Variable pays took on further importance, as retention of top talent and business challenges abounded. Organizations have taken to more customized of rewards, in a bid to cater to the more personalized needs of their people, looking to retain them at an umbrella level and not just by showing the buck. 

Predictions for 2020: Economy and Pay

Global growth is projected to edge up to 2.7 percent in 2020 and to 2.8 percent in 2021. Slowing activity in advanced economies and China is expected to be accompanied by a modest cyclical recovery in major commodity exporters and in a number of EMDEs. On a positive note, EMDE growth is projected to pick up from a four-year low of 4 percent in 2019 (0.3 percentage point below previous projections), to 4.6 percent in 2020-21. Despite this projected recovery, per capita growth in a large number of EMDEs will remain insufficient to narrow income gaps with advanced economies, leading to pay parities being skewed.  

2020 salary increases across the globe are expected to grow at more or less the same rate as 2019, slowing inflation will mean an increase in real-wage salary growth. Salaries are predicted to grow at a rate of 4.9 percent globally in 2020**. With a global inflation rate prediction of approximately 2.8 percent, that puts the real-wage salary increase prediction at 2.1 percent. This is a positive sign for employees, because it effectively translates to higher disposable income and higher spending capacity, which in itself are good for the economy. 

What Can Public and Private Entities Do?

The good news is that growth is projected to gradually rise to 2.8 percent by 2021. It is the responsibility of both public and private sectors to ride over this era of uncertainty. Fixing the salary trends to make them more employee as well as organization-friendly, requires proactive measures to promote private investment as well as improve public sector efficiency. For example, although the demand for industrial commodities has generally softened, prices have partially recovered because of tightening supply conditions. Policy makers of EMDEs must put in place well-designed social safety nets and active labour market policies to cultivate the right salary diaspora.  

The Role of HR

At the corporate level, it is important to ride over this wave, and build a strong talent foundation through innovative pay practices. HR and business leaders must institutionalize processes and initiatives to identify high potentials, top performers, and critical talent within their organizations. Considering mere salary pay-outs and variable pay (short term incentives and long term incentives) is no longer enough. The latest look-out for new-age talent is to look at the Employee Value Proposition holistically- a mixed bag of compensation, benefits, learning and development opportunities, culture, career growth, wellness and wellbeing, and much more. For example, millennials are actively looking out for consumer-led digital experiences in their place of work. What will truly help attract, engage and retain the new-age top talent is understanding what truly attracts and motivates different talent segments, and catering to their personalized needs. HR is the conceptualizer and implemented of today’s talent-magnets. As employees’ expectations shift, Compensation and Benefits is shifting towards Total Rewards, and is becoming more intangible by the day. For this, HR and Rewards professionals must work closely with business leaders to understand the business and economic environment, and accordingly devise an aligned Total Rewards philosophy and strategy. Winning the War for Talent is possible with this wider outlook towards talent management. 

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Topics: Compensation & Benefits, #Rewind2019

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