On Thursday, November 3, 2016, the Egyptian Pound (EGP) was allowed to float freely in the currency market. As a result, the pound lost almost 75% of its value in one day. Now, twelve days later (November 15), the exchange rate is holding at 15.4853 EGP per U.S. Dollar, a drop of 74.5%.
The impact of the devaluation will be profound. Imported goods will rise in price, adding to the already high inflation of around 15%. Employees’ purchasing power will be reduced as a result.
How Should Employers Respond?
In a word, cautiously. The natural reaction of staff is to turn to their employer and look for an increase to cover their “loss,” but this is not how you should proceed. Staff might ask for salaries to be converted to hard currency, such as U.S. dollars or Euros. Again, this is not how you should proceed, either.
Employers use a “cost of labor” model to set salaries, driven by supply and demand factors (e.g., availability of jobs, number of qualified candidates, etc.). Any salary increases granted need to be paid for with corresponding price increases, in order to preserve company margins.
Employees participate in the local economy. While devaluation is likely to bring some price increases for imported goods, this will be reflected eventually as increased inflation. It is unlikely at this stage that employees will actually incur losses of 75%, because prices will not increase in lockstep with the devaluation.
Use a Policy-Driven Approach
There is a disconnect between employee expectations (“you need to protect me through this crisis”) and employer actions (“let’s see what the market does before we do anything – we need to keep costs under control”). So how can you differentiate your company in the market and also satisfy your employees?
Our recommendation for employers is to establish a “Special Measures” policy, which outlines the specific steps the employer will take if certain triggers are met. If the triggers are met, an immediate action takes place.
In a case like Egypt, where a maxi-devaluation has occurred, we would suggest a modest, across the board pay increase of about 25% of the devaluation (around 18%). This increase should be treated as a temporary allowance and be paid immediately. Such actions will address the immediate concerns of employees, and while it might not match their request to be “kept whole,” it provides a modest sum which ensures that they will be able to continue to meet necessary expenses and put food on the table.
Next, use market data to monitor what is actually happening amongst peer employers. It usually takes about six months for the data to reflect actions taken as a result of an economic crisis. As the data shows market movement, employers can recharacterize the temporary allowance as permanent, basic salary.
By providing the temporary allowance within a short-time after the crisis begins, employers send a strong signal to employees that they care about the well-being of their staff. By referencing market data, employers can address the crisis and still maintain a market-driven approach to pay setting.
How Birches Group Can Help
Birches Group can assist employers in developing a sound Special Measures Policy, which should address not only high devaluation, but also inflation and non-economic events such as civil war or unrest and natural disasters. The policy should include specific triggers, and a clear way to transition any allowances into salary over time.
Our salary survey in Egypt, like all our surveys, is updated three times a year, in April, July and October. Subscribers can rely on the updates to assist in monitoring market movement post-crisis.
For more information about our surveys or for assistance in developing a Special Measures Policy, please contact us.