The silver lining to recession

By Johan Ericsson

Salary rises are starting to replace salary freezes across Europe, Middle East and Africa (EMEA), reflecting the improving economic situation across the region. Yet despite this positive overall trend, there are significant differences between regions, countries and job level, according to Mercer's most recent Total Remuneration Pulse Survey (TRS).

What's more, the survey findings indicate that reward practices are not returning to 'business as usual': instead, companies have learned valuable lessons during the past two years of austerity, and are turning increasingly towards performance-related pay and total rewards to make their restricted salary budgets work harder for them.

Western Europe

In Western Europe, the number of companies freezing salaries this year has fallen to under 5 per cent. The average would be even lower without Ireland, where 20 per cent of companies are freezing executive salaries and 10 to 15 per cent are freezing salaries at other levels. Some countries, including Sweden, are experiencing no salary freeze, which suggests that the hard medicine they swallowed when the financial crisis bit in 2008 and 2009 has had the desired effect: at one point 68 per cent of Swedish organisations froze executive salaries, the highest reported level.

What's more, most Western European markets are now budgeting for higher salary increases this year than they were predicting even as recently as the last quarter of 2010. The average increase is 2.6 per cent to 2.8 per cent, depending on job level. In the UK, the budgeted increase for all job levels is around 3 per cent, yet inflation, which is still running at about 4 per cent, is eroding the real value of those increases. Rises for executives are higher than those for blue-collar workers in all countries but Switzerland and Norway (in Norway blue-collar pay rises will be 3.5 per cent this year), while Greece, Ireland and Portugal are awarding the lowest blue-collar increases – at 2 per cent.

So while salary freezes are declining, pay rises are close to or even below inflation in many Western European countries, breaking the '0 per cent taboo' that has prevailed for many years. Historically, even lower performers in western markets would receive an increase of at least inflation rate – although in the more performance-related culture of the US '0 per cent' rises for low performers were less unusual. But it seems that the pay freezes in Western Europe over the past two years have ushered in a climate where companies can direct their pay towards the individuals that really drive organisational performance.

So if companies are to extract as much value as possible from their pay budgets they need to carefully segment their workforce according to the contribution different groups of people make. Mercer's research shows that the companies that do this well are able to award increases of 15 to 20 per cent to high performers, out of an overall budget pot just 3 to 5 per cent higher than the previous year. Companies are also making greater use of non-cash and 'spot-cash' rewards in order to ensure that they can both manage tighter budgets and attract and retain talent.

Central and Eastern Europe

There are bigger variations and discrepancies in pay between countries and job levels in Central and Eastern European (CEE) than there are in Western Europe.

Across the region 8 to 10 per cent of companies are still freezing salaries – though this has fallen from 50 to 60 per cent two years ago. While executives bore the brunt of the pay freezes in Western Europe, in CEE it was blue-collar workers who suffered most, due to the high demand for executive talent in the region. Pay freezes will be most prevalent in Ukraine and the Baltic countries of Latvia, Lithuania and Estonia this year, given their slow recovery from recession, and while they have started awarding salary increases these – at between 1.8 and 2.8 per cent – are the lowest in the region. By contrast, no companies in Hungary and Slovenia are planning salary freezes this year.

The average pay rise in CEE is between 5.6 and 5.8 per cent, depending on the job level, boosted by higher increases – 10 to 12 per cent – in markets such as Kazakhstan, Russia, Ukraine, Georgia and Belarus, which are suffering 12 to 13 per cent inflation. Countries such as the Czech Republic, Slovakia, Slovenia, Bosnia and Herzegovina are awarding pay rises of between 3 and 3.5 per cent – very similar to some markets in Western Europe.

From the mid-1990s onwards, cash was the key driver of salary packages in the CEE region. But the companies that emerged fastest from the financial crisis and consequent salary freezes were those that exercised most discretion over where they cut. These firms have also enjoyed an influx of talent from their competitors that imposed blanket freezes. So while cash remains an important element of the reward mix in this region, one of the main lessons of the past two years is that there are always competitors who can pay more.

There is, therefore, a growing realisation of the need to use the full spectrum of reward, and companies are starting to develop a 'total reward' mindset. An important part of this, as they recognise, is communication – not least to overcome the cultural barriers that make employees in the region value cash more highly than other benefits. So organisations wanting to attract and retain talent while keeping a lid on their salary costs need to start focusing on helping individuals become more marketable and employable.

Africa and the Middle East

There are even greater differences and discrepancies in pay in this region, where salary rises range from 0 per cent in countries such as Ivory Coast to 14 per cent in countries like Ghana.

Average increases across the Africa and Middle East (AME) region are 7.4 to 7.6 per cent, depending on job level, but the average for the Middle East is lower, at 4.8 to 5.4 per cent. Indeed, the Middle East is a more homogenous region, with the exception of Israel, where rises are in the 3 to 3.5

per cent range, and Bahrain, where they are around 6 per cent. Around 8 to 10 per cent of companies in the AME region are freezing salaries in 2011, down from over 20 per cent in 2009, with Cameroon, Ivory Coast and Oman among the countries with the highest levels of salary freezes and the lowest salary increases (of between 4 and 4.5 per cent).

Of the 19 African countries that the survey covers, over half will award salary increases this year of more than 10 per cent. In the Middle East, the highest salary increases will go to managers and sales professionals, reflecting the demand for such skills.

Pay for performance is becoming more prevalent in AME, and it is only a matter of time before variable reward extends beyond the cash elements of the package (important in a zero- or low-tax environment) towards benefits such as retirement provision, if companies are to continue to attract foreign talent. What's more, the trend towards localisation (many countries have already enshrined localisation policies and quotas in law) will exert upward pressure on salaries at certain levels, given the shortage of local talent and experience. However, here again, a bigger focus on talent management and development, within the context of 'total reward', will help to mitigate salary inflation.

In conclusion it seems that across the EMEA region the silver lining to have emerged from the clouds of recession is a greater focus on the kind of segmentation and total rewards that help drive performance while keeping a lid on costs.