What are the impacts of the currently high inflation rates on employee compensation?

With rising inflation levels combined with the global cost of living crisis, companies are once more faced with the challenge of how to react as employers providing wage income to their employees. Discussing alternative actions and, ultimately, finding sustainable solutions that do justice to the extraordinary situation are mission critical.

In brief

• High inflation rates are a global topic but vary across the world and even within Europe to a great extent
• Other factors such as COVID-19, global cost of living crisis and energy crisis already put pressure on employees’ compensation levels
• Companies should now ensure to find the best possible action plan for their situation

The world is changing and is has not stopped doing so: just when employers and employees are about to recover from the impacts of the COVID-19 pandemic on work life, inflation rates are rising everywhere. The general cost of living crisis, fueled by energy resources changing, is already on the agenda of most employers. Now we can add inflation to any company’s agenda– not only in terms of production and sales, but also with regards to rewarding employees.

Setting the scene – inflation levels and regulation

Inflation has been one of the hot topics across the world for the last months. Compared to the previous year’s month of October, many markets record inflation rates beyond 10% (e.g., Germany: 10.4%, UK: 11.1%, Netherlands: 17.1%). Apart from such a trend being alarming with regards to the global pricing dynamics, it largely impacts costs of living and real wages for any employee. Even though Switzerland’s inflation rate lies much lower at approx. 3.5%, there seems no way around discussing it in the media. Unions demand salary increases and employees consider going on strike (for example Swiss Airlines) to emphasize, among others, the need for compensation of the higher cost of living.

While for employees with public law employment relationships a legal entitlement for inflation compensation exists, there is no such requirement for private law relationships. The market shows that employees demand their employers to take measures against this issue. In addition, taking action might be a differentiator in winning the war for scarce talent – doing nothing as an employer cannot be the answer.

Considering the different elements of employee remuneration inflation does not only have an impact on current fixed pay. Employees also worry about the value of any potential variable remuneration that is settled in cash and, additionally, deferred over a certain period.