High inflation is affecting us all. Many companies are raising concerns and are asking for advice on best practices. Local employees and assignees have more questions than ever before relating to inflation and the impact on their purchasing power.
How do you deal with this? Will the high inflation continue, or can we expect deflation at some point? There is so much uncertainty and no clear answer. However, there are some things you can consider with respect to the cost of living (COLA) for assignees and the local salaries that are not always keeping up with high inflation.
In the current environment, you should consider updating your COLA more regularly, to ensure it is current with the most recent inflation calculations. It should be noted that high inflation in the assignment location does not always equate to the Cost-of-Living index increasing. COLA is impacted by two factors: exchange rate and inflation. When we mention inflation, this is the relative inflation, meaning host inflation divided by home inflation. Expats tend to forget about home inflation as they are not living in the home location. Home inflation needs to be considered as we protect the home purchasing power via the COLA. The other factor is the exchange rate change. Despite high host inflation, the home currency may be strengthening versus the host currency, in which case the assignee needs less home currency to buy the same amount of host currency. This may partly offset the positive relative inflation or, in some cases, even cause the index to decrease.
With respect to local salaries, companies are facing challenging times as inflation is often so high that local salaries cannot keep up and employees are seeing their purchasing power deteriorating. To mitigate this, some companies are trying to determine which levels of the organization are most impacted by inflation in the various countries they operate in, with the aim to potentially increase the salaries of lower paid employees.
AIRINC can help with an inflation impact analysis to help companies address the impact of high inflation on the employee purchasing power and salaries. How do we do this? AIRINC has a wealth of data that can measure inflation on goods and services employees are likely to purchase. Considering energy costs are spiking in many countries, you may want to take these costs into account as well. We can provide an analysis, including taxes and gross-up data, that will demonstrate how salaries should increase across the salary spectrum and it may serve as a guide to determine actual pay raises.
Adjusting employees’ salaries should be carefully considered as the increase will have long-term effects on both employees and your salary budgets. Energy costs are one of the most visible factors driving inflation. What happens if energy costs go down? Some companies are considering paying a temporary Goods and Services allowance to help employees maintain their purchasing power. The benefit of an allowance is that it can be stopped at any time.
One thing is true: there are many unknowns and there is no crystal ball. These are challenging times, and you are not alone. All companies are experiencing the effect of inflation. Do reach out to us if you want to discuss this in more detail or share your thought process. Together we can determine how we can best address high inflation for your company.