It’s already high noon for all Board of Directors, Compensation Committees, CEOs, CHROs and Heads of Compensation to familiarize with a new situation that has not occurred during the last 30 years! We cannot deny it: we are facing a slowdown of the global economy together with substantial inflationary developments caused by a dangerous mix from different sources:
- The long-term expansive monetary policy by central banks to ensure price stability and continuous economic growth through various asset purchase programs also known as quantitative easing (the EU Central bank even had 4 programs in place).
- Supply Chain disruptions due to the ongoing Covid-19 pandemic combined with increasing consumer demand for goods as the pandemic wanes
- The Russian invasion of Ukraine that caused energy prices to surge and a food crisis with oils, grain and other crops prices to jump substantially that will push hundreds of millions of people into poverty.
If prices continue to increase companies need to act swiftly and implement appropriate compensation measures that address the challenge. In parallel, they need to act responsible towards their business and investors to ensure (at least) stable profits and margins.
There are various approaches that could either be applied separately or in a combined set-up:
- Base salary increase that fully consider price rises to guarantee actual wages
- Partial base salary increases
- Bonus target increases resulting in a total target compensation increase. This way fixed cost increases could be partially limited
- One-time allowance to offset the price hike assuming prices will rebound in 2023/24
It is critical to follow a clearly structured agenda with a comprehensive compensation planning approach. Decisions need to be aligned with the CEO, CHRO and the Compensation Committee and professionally communicated to all stakeholders. The agenda must be revisited on an ongoing ideally quarterly basis depending on macro-economic global, regional and micro-economic company developments. Implemented appropriately and with discipline, practice and tact it will foster “line of sight” of all the employees to understand the challenging environment, contribute to a positive working atmosphere, motivated workforce and sustainable company results.