Salary review practices in Turkey. A closer look at local legacy, realities and trends

Transcription

1 Salary review practices in Turkey A closer look at local legacy, realities and trends

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3 Salary review practices in Turkey A closer look at local legacy, realities and trends Contents Introduction 4 Executive summary 5 Why base pay? 6 The macro 8 Legacy and new standards 10 Trends 12 Salary review practices in Turkey 3

4 Introduction Compensation plays a critical role in organisations increasingly challenging efforts to attract, retain and motivate a talented workforce. Salary reviews also play a vital role in aligning compensation with employees competency development, sustaining desired competitive positioning in the pay market and differentiating employee performance with rewards. However, managing pay is becoming an art rather than a science in today s volatile economic conditions. Companies across different markets face various challenges characterised by their broader macroeconomic conditions during their annual salary review planning and execution. Organisations in mature markets face salary freezes to respond to economic crisis and try to balance employee expectations with budget constraints. The majority also differentiate pay increases to a great extent with performance and employee growth in a relatively stable economic environment. The same objectives are valid for companies operating in developing economic environments but with different conditions surrounding them. As opposed to the fi rst group, these organisations are more likely to experience a greater magnitude of growth and infl ation, uncertainty and year-to-year fl uctuations, which directly infl uence their annual planning and budgeting process. This study focuses on the second group of organisations and particularly those that are caught in the middle those companies operating in a developing economy like Turkey, and a subsidiary of a multinational or global parent organisation that originates from a mature market with different realities and conditions. Today, almost 40,000 companies with foreign capital operate in Turkey. This number has more than tripled in almost a decade from 11,685 in We therefore take Turkey as our case study and examine how local salary review practices evolved in the last decade during an economic transition period from high infl ation to single-digit rates. We fi rst broadly contrast the macroeconomic environment and salary review practices between developing and mature economies. We then study how salary review practices and policies shifted in Turkey during the transition period. Finally, we examine local trends in salary review and budget planning, which we believe characterises the current environment and market practices. 1 Republic of Turkey, Undersecretariat of Treasury, Foreign Direct Investment Report 2005 and List of Companies with Foreign Capital in Turkey as the end of June towerswatson.com

5 Executive summary 1. Base pay constitutes one of the largest for some industries the main operating costs, with direct impact on the bottom line. On the other hand, it is the fi xed, guaranteed and possibly the largest source of income for a typical employee. It directly impacts personal fi nances and determines fi nancial security, which in turn translates into job security concerns. Recent research fi ndings highlight this important role of base pay in Turkey: once again it is validated to be one of the top employee attraction and retention drivers, respectively fourth and third among almost 30 factors employees choose to be most signifi cant. 2. The direct relationship between infl ation and salary increases is self-evident. Yet the magnitude is not. In developing economies, we have observed 6% to 8% annual infl ation and 8%-plus salary increases, on average, for the last three years. For mature economies including France, Germany, Japan, the UK and the US, annual infl ation rates averaged around 2% with slightly higher salary increases at 3%. 3. In Turkey during the 1990s, annual infl ation rate expectations were around 70%. Today, it averages around at 8%. The changing macroeconomic landscape after economic reforms in the early 2000s and the subsequent relative stability resulted in certain characteristic shifts in salary review practices. This shift re-formulated the salary review approaches, reduced the frequency of increases and introduced new components to HR policies. 4. We had a closer look at salary review practices in the last decade and identifi ed certain trends: The annual infl ation rate seems to fall between 6% and 10% with salary increase levels converging around at 8%. The annual mismatch between the Consumer Price Index (CPI) and average salary increase levels as (was) offset across the last seven years cumulatively, in terms of purchasing power. Infl ation by quarters refl ects seasonal effects; this requires a more rigorous salary review planning towards the end of the year. Salary increases are commonly differentiated by employee performance, indicating the increasing focus on performance-related rewards in Turkey. Salary increase levels were not signifi cantly differentiated across different industries. Base pay constitutes one of the largest for some industries the main operating costs, with direct impact on the bottom line. On the other hand, it is the fi xed, guaranteed and possibly the largest source of income for a typical employee. Salary review practices in Turkey 5

6 Why base pay? Our recent 2014 workforce survey findings 2 in Turkey and across the world highlight the fact that base pay/salary remains amongst the top drivers of employee attraction and retention. Base pay ranked first in global results and fourth in Turkey amongst almost 30 different factors for employees to consider when they decide to join a new organisation. This is also true when employees consider changing their employers; it is found to be the top retention driver in global results and third in Turkey. Underlying reasons for these findings are clear. Simply, base pay is the fixed, guaranteed and usually the largest source of income for a typical employee. It directly impacts personal finances and determines financial security. This, in turn, translates into job security concerns, which is found to be the top driver of attraction and seventh retention driver in Turkey. But how do employers perceive employee priorities? Results show that employers largely understand the top reasons, but with important gaps to employee views. Job security, retirement benefits, vacation/paid time off and the physical work environment are those fundamentals that are often overlooked by employers, but matter most to employees in Turkey when deciding to join or leave an organisation. Base pay/salary is not recognised as a top attraction driver by employers in Turkey and does not rank amongst the top seven items. One possible explanation for this discrepancy is that base pay/salary is regarded as a hygiene factor by the employer and accepted as a key driver of employee attraction. Job security, retirement benefits, vacation/paid time off, and the physical work environment are those fundamentals that are often overlooked by employers, but matter most to employees in Turkey when deciding to join or leave an organisation. 2 Towers Watson 2014 Global Workforce Study and Talent Management and Rewards Survey. 6 towerswatson.com

7 Figure 01. Top attraction drivers employee versus employer view Employee view Global Workforce Study Employer view Talent Management and Rewards Study 1 Turkey Job security Career advancement opportunities Global Base pay/salary Career advancement opportunities 2 Turkey Career advancement opportunities Organisation s reputation Global Job security Base pay/salary 3 Turkey Retirement benefi ts Challenging work Global Career advancement opportunities Challenging work 4 Turkey Base pay/salary Ability to impact organisation s performance Global Learning and development opportunities Organisation s reputation as a good employer 5 Turkey Organisation s reputation as a good employer Organisation s vision, mission and values Global Challenging work Organisation s vision, mission and values 6 Turkey Vacation/paid time off Learning and development opportunities Global Organisation s reputation as a good employer Learning and development opportunities 7 Turkey Physical work environment Organisation s reputation for innovation Global Vacation/paid time off Job security Figure 02. Top retention drivers employee versus employer view Employee view Global Workforce Study Employer view Talent Management and Rewards Study 1 Turkey Challenging work Base pay/salary Global Base pay/salary Base pay/salary 2 Turkey Relationship with supervisor/manager Career advancement opportunities Global Career advancement opportunities Career advancement opportunities 3 Turkey Base pay/salary Manage/limit work-related stress Global Trust/confi dence in senior leadership Relationship with supervisor/manager 4 Turkey Manage/limit work-related stress Relationship with supervisor/manager Global Job security Manage/limit work-related stress 5 Turkey Physical work environment High level job autonomy Global Length of commute Learning and development opportunities 6 Turkey Length of commute Length of commute Global Relationship with supervisor/manager Short-term incentives 7 Turkey Job security Trust/confi dence in senior leadership Global Manage/limit work-related stress Challenging work Salary review practices in Turkey 7

8 The macro Before focusing on salary review practices in Turkey, we analysed the relationship between salary increases, inflation and economic growth across selected G20 countries. 3 This broader view helped to identify particular challenges and market norms across different geographies with common macroeconomic drivers. The positive correlation between inflation and salary increases is clear, as the two indicators are closely interrelated to each other and the difference between two country groups is self-evident. Developing economies in the pink area such as Brazil, India, Indonesia and Russia (Figure 03) show similar characteristics to Turkey with respect to inflation and salary increase levels. This group stands out from the rest with their 6%-8% annual inflation and 8%-plus average salary increases. China is an outlier to this group with its relatively higher salary increase rate almost at the same level of economic growth and with a lower inflation rate on average. The direct relationship between inflation and salary increases is true for mature economies but with significantly weaker magnitude, of course. We observe that the annual inflation averages around 2%, with salary increases slightly higher at 3% for economies including France, Germany, Japan, the UK and the US. Consequently, for those organisations operating in relatively stable markets, cost-of-living adjustments are not immediate as in developing economies, and emphasis on employee performance and pay positioning in range are stronger. 3 Based on IMF World Economic Outlook October 2015 database and Towers Watson Salary Budget Planning Reports from 2012 to Inflation data is taken as annual percentages of end-of-period consumer prices year-on-year changes. Real GDP is taken as annual percentages of constant price GDP year-on-year changes. Salary budget increases represents actual median salary increases (including zero increases, in other terms salary freezes) for the overall employee population and include merit and statutory increases, promotions and cost-of-living adjustments. 8 towerswatson.com

9 Figure 03. Inflation, real GDP growth and salary budget increases in period Three-year average of actual salary budget increase 2012/ % 11% 10% 9% 8% 7% 6% 5% 4% 3% South Korea, 3% Germany, 1% Indonesia, 6% China, 8% Brazil, 2% Turkey, 3% Saudi Arabia, 4% South Africa, 2% Mexico, 3% Australia, 3% United Kingdom, 2% India, 6% Russia, 2% 2% United States, 2% 1% Japan, 1% France, 0% 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Three-year average of annual CPI 2012/2014 Real GDP growth three-year average Note. All three data items: infl ation, GDP growth and salary increases represents the averages for the period between years 2012 and For those organisations operating in relatively stable markets, cost-of-living adjustments are not immediate, as in developing economies, and emphasis on employee performance and pay positioning in range is stronger. Salary review practices in Turkey 9

10 Legacy and new standards It is essential to have a view of historic inflation trends in Turkey in order to better understand the current salary review practices. To better understand the transition in the last couple of decades, one should recognise that it was common to expect 70% annual inflation during the 1990s. Today, it averages roughly 8%. Figure 04. Year-end inflation rates in Turkey ( ) Annual CPI % Source: TURKSTAT; Annual CPI rate of change on December of the previous year (%). The changing macroeconomic landscape after economic reforms in the early 2000s and the subsequent relative stability resulted in certain characteristic shifts in salary review practices: Approach. The ability to foresee CPI movements in an economy in general, or for a particular year, largely determines the type of approach for salary budget planning. The changing macroeconomic landscape and increasing stability in the Turkish economy in the last decade and a half gradually transformed the way organisations were planning for their salary budget increases. In the high inflationary environment during the 1990s, characterised by roughly 70% annual inflation, retroactive increases were common. Backward-looking adjustment to CPI was found necessary to determine and reflect the right level of cost-of-living adjustments to employee salaries in other words, a pay philosophy that is set to match the previous year s inflation rate at the beginning of the plan year. However, practices today embrace a more 10 towerswatson.com

11 forward-looking approach. As opposed to practices in earlier years, companies are more proactive today, and increases also take forecasts set for the end of plan year into consideration. In the downturn years of the early 2000s, when economic transition was witnessed, both forward- and backward-looking approaches were used in order to balance the volatility of inflation and determine the right level of adjustment. For example, 2003 with a previous-year inflation rate of 30% and the next at 9%; this hybrid approach allowed companies to better align their level of adjustment with the decreasing inflation rate from historically high levels to single-digit rates. 2. Frequency. During the 1990s, more frequent salary increases were necessary to reflect the cost-of-living impact of high inflation. During these years, an employee could be worse-off by more than half between the beginning and end of the year in terms of his or her purchasing power. Second, the higher frequency of salary review practices helped companies to smooth the volatility of CPI and the level of adjustment by hedging the risk of mismatch between level of CPI and salary increase rates during the transition period. Today, within the relatively more stable environment, companies find it sufficient to make increases once per year where predictability is higher and volatility is lower. Today, more than 90% of companies in Turkey conduct salary reviews once in a year Components. It is more challenging to manage different components of salary increases within a single budget in a high inflationary environment, as was the case in Turkey during the 1990s. The marginal differentiation of pay increases by employee performance is limited where double-digit inflation levels persist as the total adjustments largely driven by cost-of-living increases. Therefore, merit adjustments had been generally reflected separately from cost-of-living adjustments. So, if an organisation aimed to differentiate rewards for a high performer, it was necessary to separate the merit increase from the rest of the increase to make an employee feel rewarded for performance. As opposed to this typical method applied during the 1990s, today, 60% of companies in Turkey prefer a combined approach to recognise, reward and differentiate performance, and manage the budgeted payroll increases with a higher portion allocated to high performers. Companies following this approach generally apply total salary increase rates inclusive of both cost-of-living and merit increases. Therefore, employees with similar levels of annual base salaries might have higher or lower annual increases based on their lower or higher level of performance. In this case, an employer s appetite to differentiate performance, of course, directly determines the gap between increases based on employee performance. Figure 05. Typical characteristics of salary review practices in Turkey 1990s Early 2000s Today Economic environment High inflation Downturn Relative stability Approach Retroactive Hybrid Aspired to be proactive Frequency Twice a year Twice a year Once a year Components Separated CPI+Merit increases Fixed Fix increase < CPI Combined Total increase including CPI+Merit 4 Towers Watson General Industry Compensation Surveys The ability to foresee CPI movements in an economy in general, or for a particular year, largely determines the type of approach for salary budget planning. Salary review practices in Turkey 11

12 Trends In order to identify trends in inflation and salary review practices in Turkey, we examined developments over the last seven years. Based on this, five main findings emerge: 1. Inflation rate seems to fall between 6% and 10% with salary increase levels around at 8%. In the last three years of 2012, 2013 and 2014, annual inflation rates here taken as the rate of change on December of the previous year were, respectively, 6.2%, 7.4% and 8.2%. Against the upward trend of CPI, reported annual salary budget increase levels during this period did not show sensitivity and fixed at 8%. Figure 06. CPI versus budgeted/expected salary increases % 10.0% 8.0% 6.0% % 2.0% 0.0% Expected increase Budgeted increase Actual CPI Source: Towers Watson Turkey General Industry Annual Compensation Surveys from 2009 to Represents all types of salary increases including zero values, expected (planned or projected)/budgeted (granted) in local currency. Note. Budgeted salary increases seem to normalise around 8%, as opposed to relative fluctuations and increasing trends in CPI over the last years. 12 towerswatson.com

13 Figure 07. Annual rate of change in CPI by months Rate of change on December of the previous year (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 8.2 Months Note. Monthly representation of CPI shows the rate of change on December of the previous year. To illustrate, the six-month period inflation was 5.7% with annual inflation at 8.2% at the end of Last seven year annual CPI tends to vary in a 6% to 10% band with actual rates either at the bottom or top with almost no realisations in between. The year 2014, therefore, seems to be an exceptional one with an average CPI around 8%. The year 2014 is represented by columns in the chart and was observed to be a high-inflation year in comparison to the last seven years, mostly driven by the drop in agricultural yields and devaluation of TL during the year. 6 The most recent expectations for 2014 year-end inflation was 9.2% 7 but the actual rate was lower due to decreasing oil prices towards the end of the year. Figure 08. CPI versus budgeted/expected salary budget increases CPI 9 Index Salary Budget Increase % 10 Annual Salary Index Min Wage Rate (in TL) Min Wage Rate Index % % % % % % CPI Ratio 100.0% 115.0% 5 Towers Watson General Industry Compensation Surveys, Central Bank of Turkey Survey of Expectations, November is the base year and indexed at 100 both for CPI and salary calculations. 9 TURKSTAT. Current CPI takes year 2005 as the base year. For consistency, it is changed to 2008 and converted accordingly. 10 Towers Watson Turkey General Industry Annual Compensation Surveys ( ). Salary review practices in Turkey 13

14 2. The annual mismatch between CPI and average salary increase levels was offset across the last seven years cumulatively, in terms of purchasing power. Based on the reported annual salary increase levels in comparison to CPI levels for the same period, purchasing power remains at balance. To compare results, we also examined the annual increases in the minimum wage rate across the same years and found that minimum-wage earners income appreciated by 15% in terms of purchasing power over the six-year period. The value of money equivalent to 100 units in 2008 was worth 154 units by the end of 2014, due to inflation s depreciation effect. If salary increases are reflected similarly for the same period, an employee earning 100 units in 2008 would have 154 units again by the end of 2014, based on assumed salary increase levels as reported in surveys. Results indicate that there is an exact match between the two indices (CPI); purchasing power remains at balance and companies cover cost-of-living increases through salary increases assuming CPI perfectly reflects depreciation. For minimum-wage earners, we examined the same relationship and observed an increase in purchasing power of their wages of 15%. It is found that 100 units of wage in 2008 increases to 178 by the end of 2014, which is 1.15 multiples of CPI. Figure 09. CPI versus budgeted/expected salary budget increases CPI Annual Salary Index Minimum Wage Rate Index Inflation by quarters reflects seasonal effects; this requires a more rigorous salary review planning towards the end of the year. Inflation by quarters 15 between 2005 and 2014 shows that CPI tends to increase at a higher rate and accelerates during the first and last quarters of the year. When CPI movements are analysed by quarter, results show that CPI tends to increase roughly by 2.3% at the end of the first and by 3.3% at the end of the fourth quarter in a given year. These rates are higher compared to second and third quarters, respectively, with 1.6% and 1.0%. The higher increase in CPI during the fourth quarter brings significant challenges since this period corresponds to salary budgeting for the next year. Therefore, HR professionals should aim to foresee the most accurate year-end inflation rate before or during this period and reflect these trends over their budgeting process as much as possible. Results indicate that there is an exact match between the two indices (CPI versus salary index); purchasing power remains at balance and companies cover cost-of-living increases through salary increases assuming CPI perfectly reflects depreciation is the base year and is indexed at CPI Data, TURKSTAT. 14 towerswatson.com

15 Figure 10. Trends in quarterly CPI movements CPI (quarterly averages) Year T-1 Q1 Q2 Q3 Q4 Quarters Source: TURKSTAT, CPI. Note. Quarterly CPI movements are calculated by averaging inflation rates (CPI at the end/beginning of the quarterly period) for each quarterly period between June 2005 and December Salary increases are more commonly differentiated by employee performance, indicating the increasing focus on performance-related compensation in Turkey. As of today, 16 we see that 61% of employers in Turkey use a combination of both general and merit increases, 30% make only merit increases and the remaining 9% choose to make only general salary increases. When compared to mature markets such as France, Germany or the UK, where annual CPI is lower, Turkey appears to use merit increases less than the reference group as the cost-of-living increases need to be compensated through general salary increases. Figure 11. Types of increases across selected countries % of companies reporting 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Turkey 46 7 UK General increases only Merit increases only Combination of general and merit increases 39 9 Germany France 3 Countries Note. Numbers may not add up to 100% due to rounding. Nevertheless, salary review practices in Turkey seem not to be drastically different from those in mature markets, and performance seems to be an important factor to differentiate salary increases. We observed that in 2008, almost 70% of companies in Turkey were differentiating salary increases in favour of higher-performing employees. By 2014, the same rate increases to 84% Towers Watson General Industry Annual Compensation Surveys, Reported Median Salary Budget Increases. 14 Minimum Wage Rates, General Directorate of Budget and Fiscal Control. 15 CPI Data, TURKSTAT; % of increase of CPI by each quarter from June 2005 to December Towers Watson 2014/2015 Global 50 Remuneration Planning Report. 17 Towers Watson Salary Budget Planning Reports ( ). Salary review practices in Turkey 15

16 Figure 12. Percentage of companies in Turkey differentiating performance during salary review 18 % of companies reporting 100% % % 70% 60% 50% 40% 30% 20% 10% 0% Performance differentiation No differentiation Years Source: Towers Watson Salary Budget Planning Reports ( ), Note. For performance differentiation we considered the following responses: 1) Entire budget increase allocated to high performers, 2) Larger portion allocated to high performers or 3) High performers are excluded from planned salary decreases. For no differentiation, we assumed the following: 1) Budget increase allocated to all employees at the same rate or 2) Administer the same rate of decrease/freeze to all performers. Figure 13. Factors considered to determine individual merit increases 19 0% 20% 40% 60% 80% Years in current position 15 Years of service 13 Evaluation of competence/potential 30 Market comparison/competitiveness Position in salary structure Performance evaluation Note. Results indicate the average percentages amongst different employee categories (professionals, management, and so on), as provided by participant companies. In terms of pay administration, position of an employee s salary in range is expected to correlate with skills, performance and experience. Highly skilled, strong performers are expected to get higher increases and to be positioned at higher range amongst similar roles. Performance evaluation is found to be the most common factor used by more than 70% of companies in Turkey to differentiate increases and determine the level of individual merit increases. However, evaluation of employee competence and potential was observed to be used by a limited percentage of respondents. This might be due to lack of organisational competency models that are structured and integrated to reward programmes commonly across participants. 18 Towers Watson EMEA/Global Salary Budget Planning Reports Towers Watson Turkey 2014 General Industry Annual Compensation Survey. 16 towerswatson.com

17 5. Salary increase levels across different countries were not significantly different from each other. In the last three years, the actual budgeted salary increase levels across industries were observed to be similar to each other. Performance evaluation is found to be the most common factor used by more than 70% of companies in Turkey to differentiate increases and determine the level of individual merit increases. Figure 14. Salary budget increases across selected industries Salary budget increase 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Years Overall Automotive Chemical Energy Financial services FMCG High-Tech Media Pharmaceutical Retail Note. Including zero salary budget increases. In 2014, the overall salary budget increases averaged around 8% with very limited differentiation across industries with less than 0.5% variation. Reported salary budget increase levels might be different from other reported data in this report due to different sources of surveys with different data collection periods. 20 Towers Watson Salary Budget Planning Reports Salary review practices in Turkey 17

18 Further information For further information, please contact your Towers Watson consultant or: Elif Er Ege Siva towerswatson.com

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20 About Towers Watson Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 16,000 associates around the world, we offer consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com Towers Watson Danışmanlık Limited Şirketi Astoria İş Merkezi Büyükdere Cad. No:127 A Kule Kat:4 Şişli / İstanbul Tel: turkey@towerswatson.com Towers Watson is represented in Turkey by Towers Watson Danışmanlık Limited Şirketi. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, eu.unsubscribe@towerswatson.com with the publication name as the subject and include your name, title and company address. Copyright 2015 Towers Watson. All rights reserved. TW-EU December towerswatson.com /towerswatson