Inflation: Influential, Impactful or Indifferent?
Going Back in time
Anandorup Ghose
Director – Talent and Rewards
Aon Hewitt
Poonam Chopra
Senior Consultant
Aon Hewitt
Over the last two decades, salary increases in India have seen many peaks and troughs before plateauing at approximately 10% in the last two years. Let’s rewind to 1991-92 where it all began. Our abysmally low salary levels and an acutely intense ‘war’ for talent in an economy that was just opening up led to average salary increases as high as 20%. This continued to a large part in the next decade, although with increments lower at palatable levels of around 15 -17 %. Then came the decade of 2000s. While salary increases in the early part of this decade moderated to 10-12%, the rapid growth period from 2004 to 2007 took salary increases again to the 15% mark. This decade was marked by high business growth which to some extent fuelled profligacy in compensation spends. The budgets for compensation remained significant but not enough questions were raised on whether the investment was yielding thedesired results. The big pause however, came with the 2008 global financial crisis, with increased scrutiny on pay levels and its effectiveness. Companies started questioning the very rationale for salary increases in the broader context of the economic slowdown. Reeling under this pressure of consistently escalating salary costs, businesses in India consciously began tapering down the salary increases in the last few years, but these continue to remain the highest in APAC and still in the double-digit space!
The Current Conundrum...
Amidst a continued trend of double-digit salary increases in India over the last decade (barring the year of global financial crisis), rewards practitioners have been in the middle of a much heated debate. While high and steady consumer price inflation figures are constantly driving employee expectations towards higher salary increases, boards on the other hand are keener than ever to see a distinct correlation of salary increases with business performance. The fundamental premise of salary increases, i.e. helping the company attract & retain talent and drive desired performance while protecting employees from increased cost of living is being challenged.Therefore, a big question on the mind of corporate India is how to accurately determine the impact of inflation on salary increases. On the surface, the equation seems simple – rising inflation should be accompanied with higher salary increases and vice versa. But anyone will tell you that this is not how it plays out, or perhaps even how it should.
Exhibit 1 above represents salary increases and its inter-linkages to GDP and inflation across years
Salary increases today are determined by considering a myriad set of factors, from micro level factors such as benchmarks on salary increase trends, business performance indicators, budget affordability parameters to macro level factors including country’s GDP growth and consumer price inflation. Our objective through this note is to better understand the impact of consumer price inflation on salary increases and help organizations de-code the extent of this impact and its variance across levels within an organization. We are attempting to do this by testing a series of hypothesis.
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