Inflation Challenges

If organizations are to retain the best talent, helping employees to  navigate the effects of inflation is a smart long-term investment.

It takes a good memory (or a long career) to remember a time when inflation was such a challenge for business.

Yes, there was a spike after the banking crash of 2007, but for many senior leaders the most recent inflationary environment will have come as a new experience.

In 2022 as a whole, the inflation rate reached an average of 7.9%, the highest level since the founding of the Bundesrepublik.

The German government has predicted that 2023 will see an average inflation rate of 6%.

“Headline inflation in Germany seems to have reached its peak and, unless there is another large surge in energy prices, double-digit inflation numbers should be behind us for a long while,” Carsten Brzeski, economist at ING Bank, was quoted in the FT.

But whilst the worst might seem to be over, the days of cheap money will certainly not return overnight. As a result, consumers will remain cautious with their purchasing power in 2023 forecast to be further eroded by stubbornly high prices of essential goods and rising interest rates.

Big questions to answer

“Generations of those consumers will have never experienced a world of high prices, and this will challenge business models, value propositions and retail relationships built on the assumption of low inflation”, says Dagmar-Elena Markworth, Partner at Odgers Berndtson Germany.

It is forcing many CEOs and their teams to take a good hard look at their current business.

And ask some hard ‘big picture’ questions.

What really works at the core of the business that we can back and, more importantly, that customers are really engaging with? What’s got to be the focus for this business to be healthy? And, are there any parts, that are a distraction and not returning what they should be? Who are your most valuable customers and how do you ensure you maximize the value from them?

There’s another group of valuable people hit by inflationary effects who have to be considered too: your employees.

As prices rise, and employees feel the pain, there are important issues to deal with. Especially in a world where valuable talent might be lured away unless some form of support is offered to employees.

It is worth remembering that in the Deloitte European CFO Survey of Autumn 2022, the  current shortage of skilled labour emerged as one of the top three risks for CFOs in autumn 2022.

Are you sufficiently mindful when it comes to an individuals’ circumstances? Do you have measures are in place to spot any signs that could be a concern for your employees’ welfare? Have you introduced measures that can mitigate those hardships?

Wages are just part of the equation

Yes, there will have to be an honest discussion of wages, but maybe this is also the right time to review your compensation model in order to stay competitive.

Is your compensation and the benefit structure in line with the market? Where exactly do you rank?

Many organizations have ditched the annual raise for more frequent pay reviews.

This might be a time for one-off payments or tax-free vouchers to assist with rising bills and food prices, providing subsidised meals at work or facilitating car-share arrangements.

Loans for public transport or salary sacrifice schemes can help share the burden between you and the employee.

Compassion and understanding

Other than cold, hard cash, compassion and understanding can and will go a long way. A negative economic phase will highlight the different needs of different employees, and those differences should never be forgotten. We need to remember the lessons of lockdown when there were a wide variety of experiences for employees living in different circumstances or from different social groups.

Perhaps an employee is more concerned by the cost of travel, so may wish to choose where they work to suit their financial situation. Many employers can give this flexibility, especially when the effectiveness of remote working has been proven over the pandemic.

“Key to any changes is communication, and ensuring that there is fairness, clarity and plenty of opportunity to get advice, in confidence if required.

Adverse financial circumstances and the uncertainty that often surrounds it can produce stress and affect productivity so broader support around wellbeing and mental health should be as integral to any employee assistance programme as financial help”, says Christine Kuhl, Partner at Odgers Berndtson Germany.

What is your employee value proposition?

Kearney suggest that now is a good time for your CHRO to put a real focus on your employee value proposition

“What brings your employees to work every day? In a world where top talent has options and compensation is competitive, the key differentiator for a current or potential employee can be your value proposition.

“As employees consider new opportunities to grow, well-paying roles with clear purpose and work–life balance will see better talent retention. Organizations that have a clear value proposition will see greater retention, even during soaring inflation.”

If you want to discuss these issues and how they affect your talent and leadership planning, or perhaps want advice on your own career trajectory, please get in touch.