Inflation: Influential, Impactful or Indifferent?
Through this analysis, we concluded the following:
- Absolute spendable income is directly proportional to the total income and lifestage of an employee. Spending on
goods &services being higher for married employeesas compared to single and higher for those with children as compared to
married employees without children
- In percentage terms however, spendable income (which is most impacted by inflation) is inversely proportional to the
total income of an employee, as the level of taxes, savings and other discretionary spends are higher at higher levels
- The higher the level/grade of an employee, the lower the impact of inflation as a % of total income, varying from 6.1%
for the junior most employee to 3% for the senior most employee within an organization, assuming an 8% inflation rate
- With an 8% inflation rate assumed for this analysis, the real increment (net of inflation) delivered to employees
varies between 40-65% of the overall salary increase granted by an organization, with the highest erosion in salary
increase quantum observed at the lowest employee levelsThe above analysis was indeed at an interesting one since it
challenges the basic premise followed by organizations for disbursement of increments across levels and brought to the
forefront the following key questions:
- If the impact of inflation on total income or fixed pay is typically 50% of the prevailing rate of inflation across
levels, then why should organizations provide salary increases that match or are higher than the overall inflation rate?
- Is the real increment (salary increase net of inflation) being provided by an organization, reflective of its merit
philosophy and adequate as a reward for performance?
- An analysis of the salary increase data for the last 14 years across performance ratings revealed that the ratio of
salary increase between a top performer and an average performer has moderated to 1.7 times (17% for a top performer vs.
10% for an average performer) in 2013 as opposed to 1.9 times for India Inc. in 2001
- This coupled with an inflation rate of 3.8% in 2001 vs. a staggering 11.2% in 2013 indicates that organizations have
protected the minimum salary increase provided to employees in 2013 by trying to match the high inflation rate, while not
being able to increase the maximum increment owing to cost pressures. Thus, convergence of salary increases has been
observed between a top and an average performer, especially during high inflation years
- There is a 3.1% variance in the impact of inflation between the lowest and highest employee level (AH2 & AH10 in
Exhibit 5, page 24) but only a 1.3% variance in the salary increase percentage across levels for 2013. With this gap
between salary increases across levels converging further in 2014-15, is the differentiation in increments by levels going
to be enough to help the lowest level employee overcome the highest impact of inflation?
No Easy Answers But Definite Direction...
We believe the whole aspect of salary increases in India is going through an evolutionary phase that most
developed economies went through a few decades back. In the past, we may have seen greater prevalence of salary budget
decisions in India being based solely on salary increase benchmarks across peers. This has changed now with organizations
working through a host of factors, ranging from macro level factors to micro level factors. We do not believe that there
is a formulaic approach that can be applied to determine salary increases in India yet – not only is there limited data to
establish true causality, there are also too many disparate and independent variables that prevent a real equation to
evolve. Hence, rationally determining the amount of salary increase an employee should receive will continue to be one of
the toughest decisions a rewards practioner has to make. Our research however, does help prove a defined linkage between
salary increases and inflation; one of the many factors impacting salary increases but a sensitive one from an employee’s
perspective. It would be unfair to hold organizations hostage for providing salary increases that match or even outstrip
overall consumer inflation rates in any year. In fact, the average impact of inflation (assumed at 8% CPI) on salary
increases is approximately 4%, implying that for every 1% inflation rate, the real increase in spending power for an
employee is being eroded by an average of 0.5% across the organization. Employers can use this equation for computing
salary increase budgets by level that help offset the impact of inflation and protect the purchasing power of an
employee’s salary.
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