One of the most challenging situations that compensation professionals face is how to respond to unexpected or unusual external events such as maxi-devaluation, civil unrest, or natural disasters.
On Monday May 7, the new government of Malawi agreed to the demands of the IMF and other donors, and floated the Kwacha, resulting in a 47% devaluation versus the US dollar. The new exchange rate, 246.26 Kwacha per US Dollar as of May 13, is fairly close to the parallel rate that has been in effect for the last several months, so in many ways, this move just makes official a rate that has been operational already in many parts of the economy.
Employees will now approach their employers asking how the company is going to protect their level of wages, especially to compensate for the expected price inflation that often occurs following a devaluation. Compensation and HR professionals should move cautiously with salary adjustments.
Labor markets are impacted by economic conditions, but the fundamental principle that impacts salary levels is the cost of labor, not cost of living. Supply and demand, not inflation or cost of living, determine the price of labor in the market. See my prior posts on Inflation and Devaluation for a more detailed explanation.
That’s the theory, but how should an employer address the very real concerns that employees will raise following a maxi-devaluation?
You need a policy. Here are some policy suggestions to address devaluation:
- Focus on Stability
In the developing world, economic and political instability is common. Employees want employers to provide stability despite the inherent instability in the country. So you need a policy that outlines how your company will respond when certain external events occur.
- Set a Threshold
Define a threshold level of devaluation above which your policy takes effect. This leaves no room for debating when the policy should be applied.
- Define Actions
The policy should describe the actions to be taken, the time frame for these actions, and how the ongoing situation will be monitored going forward. For example, you might stipulate that an immediate adjustment of 15% to 20% of the devaluation be implemented, as an allowance which is separate from salary. Once the situation in-country is more stable, decisions can be made about how much of the adjustment should be made permanent. A period of four to six months is usually needed to sort things out.
- Measure the Market, and then Measure it Again
You should, of course, know your market position based on a high quality market survey. Birches Group can help you here – we conduct surveys in over 140 developing market countries. Are you on target, a bit high or a bit low? If you have a high position, keep this in mind when deciding about any permanent changes. Similarly, if you are in a low position, this could be a good time to fix it. After an event like a maxi-devaluation, your survey data is going to rapidly be out-of-date. Your provider should be able to advise on how employers in the country have reacted to the economic events and estimate a percentage that reflects the prevailing practice. Use this, together with your market position, to determine permanent adjustments and next steps.
This will ensure that expectations are reasonable and there are no misunderstandings about what the company will and will not do in response to a crisis situation.
- Be Consistent
Once you’ve established a policy, use it! It is easier to apply a policy consistently than have to explain why exceptions are made for some and not for others.
If your company has staff in Malawi right now, what are you doing to provide stability to your local staff? Please share your approach in the comments section.
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