Today’s labor market and economy are truly unique. The demand for labor during the pandemic recovery is fierce and workers are quitting jobs at record rates. Employees and employers across India are feeling the effects of inflation at a six-month high. When the national labor shortage is combined with the declining value of the rupee resulting from inflation, it becomes clear why expectations around employee compensation are changing.
The inflation rate and its effect on take-home pay
India’s benchmark inflation rate, measured by the Consumer Price Index (CPI)—a measure of the average change over time in prices paid by consumers for a market basket of consumer goods and services—ended at 5.59 percent year-on-year in December 2021. The CPI is used to measure inflation by tracking the changes over time in the prices paid by consumers. A fixed income—combined with rising prices—decreases a worker’s ability to purchase the same number of goods resulting in an increased cost of living.
The inflation rate has a direct effect on a worker’s income. When an employee’s salary increase is less than the inflation rate, it results in a loss of purchasing power. A worker earning INR 1,006,830/year in 2020 is equivalent in purchasing power to about INR 1,043,971/year today. To determine the effects of inflation on your purchasing power, use an online inflation calculator.
Inflation does not affect every worker the same. People purchase different products and services, making everyone’s true inflation rate different. Lower-income households are impacted more by inflation because they spend a higher proportion of their income on essentials such as food, energy, and transportation.
How the inflation rate is affecting compensation expectations
Today’s tight labor market has given workers the upper hand for the first time in at least two decades. Combine that with strong inflation and employers can expect greater demand from workers for a cost-of-living adjustment in 2022. What can workers expect in return? Here are things to look for as we start 2022.
Salary increases: According to the latest Salary Budget Planning Report by Willis Towers Watson, India is expected to see a median salary increase of 9.3 percent in 2022. This compares to 8.0 percent in 2021.
However, just because inflation is high, it doesn’t mean employers feel obligated to cover the entire increase. Inflation is negatively impacting companies and increasing their fixed costs as they work to rebound from the pandemic. After being a non-issue in wage determination for several decades, inflation at the end of 2021 was likely to be well above many organizations’ salary increase budgets. Raising base pay for highly compensated employees has a permanent effect on an organization’s fixed costs. Therefore, companies are going to be hesitant to raise salaries at the same rate as a high inflation rate that is likely to level out next year.
To avoid permanently impacting their fixed costs, companies are turning to other methods to reward employees. Compensation is more than just a salary as organizations are differentiating themselves through total rewards and hybrid work arrangements by offering items such as the following:
Bonuses: One-time performance and retention bonuses give companies the ability to increase an employee’s pay without the risk of locking in raises into future years.
Perks: Tuition reimbursement, gift certificates, gym memberships, and discount programs—on items such as car insurance, wellness, daycare, and tutoring—offer organizations a way to reward their workers while helping to decrease their expenses.
Flexibility: Workers value employers that empower them to manage their own time and give them the flexibility to utilize their time most efficiently. Employers are listening! Around 70 percent of Indian organizations are looking at hybrid work models beyond the pandemic. A hybrid work model offers employees many benefits such as an improved work/life balance, flexibility in child care, more time for daily exercise, and cost savings.
Professional development: To help their employees feel engaged and valued, companies are offering reimbursements for workshops, seminars, and continuing education classes.
Companies are increasing wages to attract and retain talent and account for inflation. These salary increases will help bridge the gap between their employees’ fixed income and the increased cost of living but may not be enough to cover the entire amount. Employers and employees need to be open to other reward methods while we all work to navigate this unique time in history.