The Argentine economy continues to be a challenging one in which to conduct business. For the 12 months ending April 1, 2016, devaluation versus the US dollar stands at around 93%, inflation has been measured at 40.5%, and the forecast for inflation by year end is 32%. There is currently negative GDP growth, and by the end of the year, GDP is only expected to reach 0.8%. The economy is not growing, the currency is weakened and inflation is relatively high. [Source for economic data: www.tradingeconomics.com.]
Under circumstances such as these, we are often asked by clients how to manage compensation for local staff. Should we match inflation? Devaluation? Some other approach?
Birches Group advice is to match the labor market (as measured by reliable market surveys, including ours). Inflation, devaluation and GDP are all interesting measures, and they do give you a sense of what is happening economically in the country. But labor markets move according to the cost of labor, which is influenced, but not correlated to the other factors.
How Are Employers Responding?
We conducted a special survey in April, 2016, to determine how employers are actually managing their compensation programs in Argentina during the crisis period. Here is a brief summary of the results.
How Many Pay Increases Are Planned?
The first question we asked was how many pay increases are granted (or planned) in Argentina for 2016:
The market is evenly split between one increase, two increases and those that are taking a wait-and-see attitude.
Which Pay Actions Have Been Taken, and Which Are Planned?
We asked each employer to indicate what pay actions they have already taken during the last six months, and what actions are planned in the next six months.
Only about one-third of the respondents indicated an increase in the number of pay adjustments or the frequency of pay adjustments, whether in the past 6 months or the next 6 month period.
This could indicate that employers in Argentina have already made the necessary adjustments to their pay practices and are simply maintaining these practices.
What is the Total Expected Pay Increase for 2016?
The overall market is increasing around 25%, while the highest observation reported was 35%. The 25% increase represents about 60% of the inflation rate, but rises to over 75% if the inflation rate drops to 32%, as estimated by year-end. Employers are being cautious about increasing fixed costs during these challenging economic times.
Ninety-two percent (92%) of employers reported using local currency (ARS) in Argentina for denominating and payment of salaries of local staff. Eight percent (8%) indicated they are using an indexing approach linked to US dollars.
In general, Birches Group recommends not linking local salaries to any foreign currency, except under extreme conditions where the local currency has lost its value and is no longer suitable for basic commerce.
Employers are advised to stay on top of market trends during periods of economic uncertainty. Continuously monitor the labor market to ensure you maintain your desired competitive position without incurring unnecessary additional costs. Tying local compensation to economic factors such as inflation or devaluation, or using foreign currency instead of local currency, are not recommended. A labor market approach provides you with the best level of control, consistency and competitive positioning.
For More Information
Birches Group surveys are updated three times a year in all 148 markets we cover. We also provide consulting support to organizations that wish to establish a policy-driven approach to managing compensation in volatile economies. Be sure to read the article “How to Manage Compensation When Uncontrollable Events Occur” and watch our webinar recording entitled “How to Manage Compensation in Volatile Economies.”