This week, the government of South Sudan abandoned the dollar peg of the pound, allowing their currency to float freely. This resulted in devaluation against the US dollar of about 84%, from an official rate of 2.96 to the new rate of 18.5. The move was inevitable, as the government finally adopted the parallel market rate, unable to sustain the official rate any longer.
There are many reasons for the weakness of the currency in South Sudan. Civil war has greatly reduced oil output and global oil prices have decreased significantly, resulting in currency pressures. The government no longer has sufficient dollar reserves to support the lower rate.
How should employers react to this event?
Typically, when a maxi-devaluation occurs, it is followed by high levels of inflation. The price of imported goods rises in local currency terms, and raw material imports are impacted as well. In the case of South Sudan, however, high inflation is present in the market already. Inflation is estimated at 95.7% for 2015 as reported by ECA International, so there is already a cost-of-living crisis.
Employees look to their employers in such situations. High inflation is disruptive and could result in hardship for many staff. But employers cannot simply raise salaries to match, because such a move would significantly impact profits.
Companies may be tempted to simply convert local salaries to US dollars or other hard currencies, but this is a big mistake. Once such a move happens it is extremely difficult to reverse it, and your organization will be saddled with excess costs for the foreseeable future.
Birches Group Recommendations
We recommend an approach which we call “special measures.” During times of crisis beyond the control of the employer, extraordinary actions are required. While economic instability is the most common, other types of crises and events, such as natural disasters and civil unrest should also be covered under the policy.
When special measures are in effect, a policy-driven approach to addressing the immediate needs of your employees is provided, while at the same time monitoring the market and ensuring a continuation of a market-driven approach to compensation. Here’s how it works.
Under a special measures approach, you establish a policy-driven response to a crisis, and the response is automatically triggered. Limited approvals are needed so companies can address the situation without delay. A typical response would be conservative, around 25% of a maxi-devaluation, for example. This amount, offered as a temporary allowance, is added to compensation.
During the next several months, employers watch market movement amongst key comparator employers, and when the market “catches up”, the temporary allowance is rolled into base salary and made permanent. This ensures you maintain your level of market competitiveness even during a crisis. Birches Group surveys are updated three times a year, so are an ideal source for ongoing monitoring of the market.
Why it works
The special measures approach described here works because it allows employers to respond to employees during times of great need. In essence, your employees know they can count on you, their employer, to take quick action during a crisis. This is a strong enhancement of your Employer Value Proposition.
While the amount will be less than what employees will ask for (they will want 100%), a partial response will ensure basic necessities can be obtained, such as food, shelter and other provisions for daily living. As the economic conditions recover, so will the labor market. Following an economic crisis, market movement often exceeds inflation in later years, catching up as compared to early years when companies are more cautious about their future cost structures.
Birches Group offers consulting support for employers who need to design and implement a policy for special measures. We can facilitate the key discussions with your management team, help explain the concepts, and assist with drafting and communications. Please contact us for more information.