It’s that time of year again when thoughts turn to next year’s budget, including salary increases. If you’re a CFO in Venezuela, you will be expected to authorize a wage increase of 26%, on average, in 2014, according to human resources consultancy ECA International. But don’t expect staff to be happy. Inflation in that country is forecast at 38% – meaning that average salaries will, in fact, shrink 12% in real terms.
In Asia, according to ECA's 2013/2014 Salary Trends Survey report, the average salary increase will be 6.8% next year. The IMF forecasts 2014 inflation in Developing Asia (which excludes Hong Kong, Japan, Korea, Singapore and Taiwan) at 4.8%. This means that the region’s employees will be better off than those in Venezuela, with a real salary increase of 2%.
These vagaries matter to CFOs as they negotiate with HR and other parts of the business on how much to grant in salary increases. The ECA survey of 316 multinational companies across 64 countries and regions looks not only at nominal rates of increase, but also at forecast inflation based on IMF data.
The resulting “real” rate of increase – the difference between nominal rise and forecast inflation – is what should be used as benchmark by finance and everyone else in the organization when judging whether the proposed increase is above, at or below the market rate.
Hong Kong Versus Singapore
So how much are companies in Hong Kong and rival financial center Singapore doling out in real salary increases next year?
According to the ECA survey of 112 enterprises in Hong Kong, the average pay rise in 2014 will be 4.5%. The IMF forecasts inflation at 3.5%, so the real increase is just 1%. “Employees in Hong Kong will receive some of the lowest wage rises in the world next year in real terms," says Lee Quane, who is Regional Director for Asia at ECA International.
One reason, says Quane, is that companies in Hong Kong are not expecting revenues to grow much because they are not confident about the global economy. Hong Kong is also a mature market with relatively low unemployment and people have become used to salary increases that stay close to the inflation rate.
Those in banking and financial services can expect a slightly higher pay rise of 5% (or 1.5% in real terms). According to Quane, this is because there is a relatively constant talent shortage in this sector, which requires specialized skills. The industry is also particularly vulnerable in times of recession, with staff cuts being the first response. That can be seen as a risk premium and can explain the higher salaries.
What about Singapore? “Projected salary increases after inflation will amount to 1.8% in 2014,” reports Quane. “This is down from the 2.2% real wage increases that employees in Singapore are currently experiencing.” This number is based on ECA’s survey of 129 companies in the Lion City.
The average salary rise in Singapore is actually 4.5%, the same as in Hong Kong. But the IMF’s forecast inflation rate next year is 2.7%, so the real salary increase is actually higher in Singapore than in Hong Kong. “And Singapore has had a much faster rate of economic growth over the course of the past three to five years versus Hong Kong,” notes Quane.
Comparing the two cities, Hong Kong comes off worse in terms of inflation-adjusted wages. Since 2007, the average income increase has been a cumulative 29%. But most of these increases have been eaten away by inflation. ECA estimates that the real increase over the period 2007 to 2013 is just 2%.
“This does have an impact of the underlying confidence of the Hong Kong workforce, and the underlying purchasing powers of Hong Kongers, which will feed through to the general strength of the Hong Kong economy,” Quane warns.
What About China?
CFOs in China should be ready to authorize some of the highest wage rises in the region both in nominal and real terms. The average wage increase among companies that provided data to ECA is 8%. Adjusting for the IMF’s forecast 3% inflation rate next year, Chinese workers will see a 5% increase in real terms.
“In China, an ongoing need to attract and retain skilled workers, who are in short supply, is driving up wage increases to among the highest levels in our survey,” says Quane. “Over time, this trend may significantly narrow the traditional salary gap between China and Hong Kong.”
For now, though, he does not see people leaving Hong Kong to work in China instead. “People still receive significantly higher incomes in Hong Kong versus mainland China at the moment, so I don’t think this would act as what we call a ‘brain drain’, where people en masse are leaving Hong Kong to work in mainland China,” says Quane.
However, the salary gap between developed economies like Hong Kong, Singapore and Japan, and developing markets like China, Pakistan and Vietnam is narrowing. The average salary increase in Pakistan, for example, is 13%, the highest in Asia (and third worldwide, after Venezuela and Argentina).
In India, the average salary increase in 2014 is 11%. The IMF forecasts 2014 inflation to average 8.9%, so the real increase is 2.1% -- which is lower than China’s 5% inflation-adjusted salary rise.
Meanwhile, workers in Japan will continue to experience the region’s lowest wage increases. If inflation in Japan rises to 2.9% in 2014 as forecast by the IMF (from minus 0.3% in 2013), the real average increase would actually be negative, meaning that buying power next year will shrink, on average.
Over time, Asia will see much greater similarities of salaries within the region, much like what exists today in Western Europe, which will have implications on how companies source talent and differentiate themselves from the competition.
Globally, wages will rise 5.8% in 2014 on average, according to the ECA survey, with most employers surveyed setting increases at the same or very similar levels to this year. Latin America (11.8%), Africa (8%) and Asia (6.8%) are the regions that will see the highest wage increases.
At the same time, however, inflation in these regions is also expected to be higher than the global average. In Latin America, for example, the wage increases after inflation average out at 1%, with the average salary in Venezuela even shrinking by 12%, as noted earlier.
Of the developed markets, companies in North America will grant 3% salary increase on average (adjusted for inflation: around 1.5%) and 3.5% by those in Europe (adjusted for inflation: 2%). Companies surveyed in Australia will grant increases of 4% on average (adjusted for inflation: 1.5%).
These numbers are far smaller compared with the inflation-adjusted increase in China. “Chinese executives could even be better off than their United States counterparts by 2017, if the current trends continue,” says Steven Kilfedder, Manager, Cost of Living and Remuneration Services at ECA International. “At present, salaries in China are increasing at more than double the pace of salaries in the United States.”
That seems rather exaggerated, given that the real increases in China are coming off a much lower base than in the US. But the ECA survey results do remind organizations of the need to benchmark against peers when it comes to salary increases – and also to take inflation into account.
The ultimate decision depends on the company’s unique circumstances, including its financial strength, talent situation, growth strategy and view of the business in 2014. And, of course, it should be the considered result of conversations between finance, the CEO and the lines of business.
About the Author
Ida Mattsson is Online Editor at CFO Innovation.