Managing employee pay in high-inflation markets

The past few years have provided practical – if unwanted – experience for many HR professionals and business executives on how to respond to the pressures of elevated inflation rates. And though inflation has calmed in most places in the world, many markets will face a surge or continuation of high inflation. This will require a targeted and timely response from both regional and global headquarters.

Inflation is not an ‘if,’ but a ‘when’ and ‘where.’ And it will shock us again

Inflation is personal. People see and feel the hike in prices of groceries, energy bills and higher interest rates. Besides making the daily cost of living visibly higher, inflation often results in a decrease in real incomes and an erosion of savings. Inflation triggers a string of challenging discussions in boardrooms, HR offices and union meetings as well as the dinner table at home.

Internationally, inflation in the past 20 years has ranged from -73% in Zimbabwe in 2007 to 65,000% in Venezuela in 2018. If we ignore these very low and very high inflation rates, for the past two decades the remaining 80% of markets have seen an inflation range of between zero and 18%.

This is a much wider range than the assumed low, single-digit inflation to which headquarters locations in G20 countries became accustomed. Despite much attention, global inflation levels from 2021 to 2023 did not deviate from that zero to 18% range — even if many economies uncomfortably moved toward the middle or even higher end of that range.

In 2024, 12 countries experienced inflation of more than 25%. More than 46 countries will see inflation at or above 6% in 2024, which typically is considered high by Western standards. Such levels of inflation were seen before the COVID-19 pandemic and are very likely to be around for the next five, 10 or 20 years.

Don’t fight inflation; play with it

In memory of the 1920s and 1970s, Western economies perceive inflation growth of more than 2% as a risk. For many emerging markets, elevated inflation comes naturally, accompanying their economic transitions and growth. If you try to curb inflation, you risk destroying desired growth. And the fact is, inflation can present new opportunities for business.

Surges in inflation often are associated with higher nominal salary budgets, which allow us to more effectively re-price the relative salaries paid for jobs and skills. At the other end of the spectrum, a nominally low salary budget increase limits the opportunity for differentiation. Manageable inflation levels should be welcomed by business leaders who want to optimize the value of their human capital!

When an inflation surprise strikes

The absolute level of inflation doesn’t trigger unease; rather, it’s the deviation from a specific market norm. Eight percent to 12% inflation does not create any steer in a country running consistently at 10% inflation. However, bring 10% inflation to a country that is used to 2%, and CEOs, CFOs and CHROs are all busy analyzing the impact and agreeing on how to respond.

This extra tension often arises between the global leadership sitting in an unaffected country and the subsidiary that is exposed to the inflationary environment. Local leadership often challenges headquarters about actual versus reported inflation, employee retention risks and slow decision making at headquarters to support local operations.

No two situations are the same

There is no simple, single answer for managing pay in volatile environments. Following are a few actions that successful companies often take.

There has never been a better time to act

Many business leaders and HR professionals have gained firsthand experience in the past three years on how to handle pay in the context of inflation surges. Now is the best time for headquarters locations to reflect on the lessons learned and update their guidelines to handle the next inflation surge.

If you are responsible for emerging markets, there is a good chance that one of the mid-size markets with high GDP growth will scream inflation just as your leadership expects strong business expansion and operational stability. Now is the time to get ready.