European Chamber in Ethiopia’s latest CEO networking event explores solutions on managing salary adjustments amid rising inflation post-FX regime change.

Against the backdrop of Ethiopia introducing a competitive and market-based determination of foreign currency exchange rates on July 29, 2024, employers have been pondering the impact the reform would have on salaries.  In its latest monthly CEO networking event that took place on October 10, 2024, the European Chamber in Ethiopia, hosted Ruth Yohannes, Founder & General Manager of The Talent Firm and Takele Dibekulu, Deputy Chief of Human Capital at Zemen Bank to lead a discussion on ‘Managing Salary Increases Amid Rising Inflation Post-FX Regime Change’. With the caveat that it has been a mere two months since the introduction of the FOREX regime change and hence the lack of substantial information for impact analysis, the HR Experts refrained from encouraging employers on making immediate salary increases – implying that monthly inflation and FX change would drive perpetual salary adjustments that are not sustainable. They rather emphasized the need for a wholistic approach that takes macro level factors into account to respond to market inflation. This includes the consideration of various factors beyond FX that would impact the labor market dynamics, which would alter the status quo on salary deals and compensations in general. The approach is centered on retaining human resource, promoting their well-being and providing support through these uncertain times.

According to the experts, the current reforms force employers to forgo the otherwise standard practice of using international salary and compensation benchmarks from the likes of Berks Group and Mercer, as well as the International Monetary Fund (IMF) and the World Bank for inflation rates, to make a cost-of-living adjustment across salary scales. The change in the labor market calls for HR professionals to practice the profession in full-fledged terms beyond hiring, firing and making salary changes. An increase in Foreign Direct Investment (FDI) with the entry of multinationals into the market will prompt a higher demand for talent, making those that have been trained on European business models more prone to employee poaching. For this reason, salary adjustments are not recommended as a sustainable solution. The anticipated launch of the capital market introduces another dynamic to the labor market, as local companies consider mergers and acquisitions and listing shares on the stock market. According to the HR experts, this would entice qualified talent to seek employment at companies that are preparing for an initial public offering (IPO). This would eventually result in a change of compensation structures that would lead to providing shareholding opportunities to employees rather than salary adjustments. In the discussion that followed their presentation, the experts recommended ongoing monitoring of the labor market to make decisions on employee compensations.

HR professionals were advised to monitor trends in the market with sector specific nuances, through assessments of changes being implemented by different organizations. For employees earning foreign currencies, employers should consider providing financial planning and personal budget management lessons to mitigate the impact of fluctuating exchange rates. For those paid in local currency, case-by-case assessments may be necessary to determine appropriate adjustments. Firms that currently make cost of living adjustments annually or bi-annually should explore more frequent evaluations, to monitor market conditions and identify potential adjustment needs without necessarily implementing immediate changes.

When considering salary adjustments, it’s beneficial to adopt a total rewards perspective, according to the HR Experts. This involves examining the broader compensation package, including allowances for fuel and housing. For employees whose salaries are denominated in Ethiopian Birr, adjustments may be necessary, especially if the last review was conducted in the distant past.

It was highlighted that certain employee groups may be disproportionately affected by ongoing inflation. While making decisions, its crucial to consider the diverse categories of employees. For high-income earners or those in top tier positions, it might be prudent to monitor developments before making immediate adjustments.

While Ethiopia doesn’t have a formal minimum wage policy, industries often establish benchmarks to stay competitive in terms of the payment that they offer to their employees. Information on food inflation is available at the monthly data shared by the statistical agency information is more relevant. For low-income earners, the government’s salary increase for the lowest earners in the government structure can serve as a benchmark.

Discussions reflected that the global practice has historically been to provide partial inflation compensation, typically ranging from 70-80%. While this approach was manageable in the short term, the cumulative impact of several years of high inflation has significantly eroded purchasing power for many. To address this, employers were advised to re-evaluate their compensation strategies.

The CEO networking event was attended by members of the European Chamber in Ethiopia and featured a remark by the newly appointed EU Ambassador to Ethiopia, Her Excellency, Sofie From-Emmesberg.