Publish in Perspectives - Wednesday, November 11, 2015
Multinational companies in Brazil need to plan for potentially significant salary increases, the author warns. (Photo: Deni Williams)
Renata Neeser is Shareholder at Littler Mendelson P.C. (Photo: Littler Mendelson).
Why salaries continue to rise in Brazil despite the economic crisis.
BY RENATA NEESER
Many multinational companies have been asking why salaries continue to rise in Brazil despite the crisis and the slowdown of the economy. Companies are stunned with the astonishing salary increases that have been imposed upon them this year, many ranging from 8 to 10 percent, and they are searching for answers.
U.S. companies are not generally accustomed to the idea that salaries should be adjusted annually based on the increased cost of living. Today, the U.S. Social Security Administration adjusts benefits annually based on the consumer price index for urban wage earners and clerical workers (CPI-W), and a few states now have automatic annual indexed minimum wage increases based on the CPI-W or cost of living index.
However, those cost-of-living increases do not affect employers with employees who earn more than the minimum wage. For those employees, compensation is driven by the market. Some countries in Latin America, like Mexico and Chile, also do not index salaries to inflation. And even in Argentina, with high inflation (around 30 percent) and currency devaluation, not all employers must increase salaries, although the majority are compelled to do so.
In Brazil, all employees are represented by a sectorial/industry union, and each union negotiates an annual salary increase with their counterpart, i.e., the employer association that represents the employers of a specific industry in a certain city/region. Therefore, all employees in Brazil are, in principle, entitled to an annual salary increase.
From the 1980s to approximately 1994, Brazil was plagued by hyperinflation, with annual inflation rates of three to four digits. During this period, adjusting salaries to inflation were a matter of survival. As an example, the price of groceries was marked-up sometimes twice a day, so no one would know how much the milk carton would cost the next morning. And so, indexation became part of the culture, and survived even after the economy stabilized at the end of 1990s.
In today’s market, unions play a major role in Brazil and constantly fight to remain relevant. So, not surprisingly, unions undertake a populist approach during economic crises. They demand salary increases above inflation rates (currently at around 9 percent), unmindful that by squeezing employers --- who may not be able to increase their prices at the inflation levels --- it may precipitate more unemployment and economic stagnation.
The recently-released report of the Inter-Union Department of Statistics and Socioeconomic Studies (in Portuguese, “Departamento Intersindical de Estatística e Estudios Socioeconômicos” or “DIEESE”) on labor negotiations of salaries for the first half of 2015 shows that the average salary increase this year exceeded the inflation rate by only .51 percent, the smallest difference since 2008.
During the first semester of 2015, approximately 69 percent of the negotiations resulted in salary increases above the inflation rate (up to 1 percent greater), 17 percent of the negotiations resulted in salary adjustments equal to the inflation rate, and 15 percent of the negotiations yielded salary increases around 2 percent below the inflation rate.
Among the sectors analyzed, 76 percent of the companies in retail and wholesale trade agreed to salary increases above the inflation rate and only 7 percent negotiated salary increases below the inflation rate. For the services industry, 74 percent of the companies agreed to salary increases exceeding inflation, and 12 percent agreed to salary increases below the inflation rate. In manufacturing, 61 percent of the companies negotiated salary increases exceeding inflation, and 20 percent negotiated salary increases below the inflation rate.
So, what can employers expect for the near future and how can they prepare for it?
Brazil will likely take a while to recover and start growing again. The Brazilian government is well aware of the dangers of high inflation—such dangers are still fresh in the collective memory—and it will take the necessary measures to contain and reduce the inflation to more manageable rates. In the meantime, however, companies need to plan for potentially significant salary increases.
Indeed, the devaluation of the Brazil currency alleviates, somewhat, the actual salary increases when you convert the salaries to U.S. dollars. Companies can put on hold merit salary increases and reduce bonus payouts if they anticipate their financial performance will decline. This strategy works if the bonus plan is based on a combination of the employee’s and company’s performance.
If these measures are not sufficient, companies should consider negotiating directly with their unions to reduce the salary increases, or to delay the salary increase and/or establish different rates of increase for employees with higher salaries. Furthermore, companies may consider eliminating some positions, giving due consideration to the likelihood of greater overtime and the loss of talent. Multinational companies with operations in Brazil should, therefore, carefully plan their next steps to weather and prevail against this continuing economic recession.
Renata Neeser is Shareholder at Littler Mendelson P.C. in New York, who focuses on International Employment Law. She wrote this overview for Latinvex.
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