The gap between pay increases and inflation is expected to remain fairly tight over the coming 12 months, which will place increasing pressure on organisations to think about labour sourcing decisions, according to a recent Mercer study.
Australian salary increases are projected at 4 per cent while inflation is likely to be 2.5 per cent. This is in comparison to countries such as Indiawhich is forecasted to see salary increases of nearly 10 per cent above local inflation.
“Employees want to feel they can at least retain spending power from one year to the next,” said Rob Knox, head of Mercer’s information products business for the Asia-Pacific region.
“Therefore HR managers can expect more frequent and challenging discussions with line managers and staff in relation to pay. These discussions are even more poignant when employees are faced with rising expenses such as fuel, mortgages, rent, and transport.”
The skills shortage will further exacerbate the situation and HR managers will need to identify key messages and potential responses in relation to managing employee expectations, according to Knox.
“Low unemployment, skill shortages, and a relatively positive economic outlook are all factors contributing to an expectation of increased pressures on salary movements,” he said.
“To manage these pressures, organisations will need to continue to differentiate how they allocate their salary budgets based on market competitiveness and employee performance.”
For example, he said it may be necessary to pass on aggressive adjustments that exceed the 4–5 per cent band to some employees that “make a difference” while providing more modest increases to others.
Movements and forecasts will be a lot more aggressive in certain industry sectors and will vary depending on region.
Over the past 12 months, pay movements in Western Australia stood at 5.6 per cent, while in South Australia the corresponding figure was 5 per cent. The same story applies to some job functions and industry sectors.
Engineers that are engaged on major infrastructure projects, for instance, have typically received pay adjustments well above the national average. “Pay increases in the range of 8 per cent are not uncommon,” said Knox.
The study found that global salaries are expected to rise by an average of 6 per cent in 2008 – 1.9 per cent above inflation. It also revealed wide global variation in both forecasted inflation and forecasted average pay on a global scale.
Steve Gross, worldwide partner and global head of broad-based performance and rewards consulting at Mercer, said some companies are experiencing labour cost savings of 75 per cent by sourcing labour from emerging markets.
“On the flipside, they generally need to invest more in employing supervisory staff and in training,”he said.
“We are starting to see that short-term costing savings from sourcing labour in emerging markets can evaporate over time. It is therefore essential for multinational companies to consider both current pay levels and future salary increases when deciding where to source their labour.”
Some companies that might otherwise be looking at emerging economies to establish their customer services are now reconsidering their options, Gross said. “Immediate cost savings are no longer the only consideration, as short-term affordability might be offset by long-term volatility in labour costs and inconsistent service quality in many emerging markets.”