Inflationary macroeconomics – and the consequences for in-house teams

Inflation rates have increased sharply around the world, and given the rising cost of living, companies have had to boost salaries to remain competitive. In-House Perspective assesses the specific challenges and changes facing companies seeking to hire and retain staff – and outside counsel – in today’s inflationary macroeconomics.

A perfect storm of logistical supply issues caused by the likes of the Covid-19 pandemic and Brexit, along with rapidly rising energy prices, has seen inflation rates rise sharply around the world. Governments can – and have – raised interest rates as a counterbalance. The Bank of England, for example, has done this twice recently, while warning of a seven per cent increase in the inflation rate this spring.

But such measures have their limits in the face of trans-jurisdictional factors such as the rising price of oil and gas. And as the cost of living rises in real terms, companies in most sectors have had to increase salaries to remain competitive and retain employees. What are the specific challenges – and changes – facing companies seeking to hire and retain staff (and outside counsel) in today’s inflationary macroeconomics?

Abhijit Mukhopadhyay is Committee Liaison Officer for the IBA Corporate Counsel Forum. He is also President (Legal) and General Counsel at the Hinduja Group in London. One of the largest groups in the world, it spans multiple industry sectors, employs more than 150,000 people and has offices in many key jurisdictions globally.

The many sectors in which Hinduja Group operates enabled it to remain flexible during difficult times, says Mukhopadhyay. ‘Overall, as a group, were we adversely affected?’ he asks rhetorically. ‘Not to a great extent. Not only are our eggs not in one basket, but they are in varieties of baskets.’

In terms of hiring, this depends on the project, says Mukhopadhyay. The financial cushion provided by the overall group’s liquidity has enabled it to concentrate its growth in certain high-investment sectors, like technology or electric vehicles, which supports the maintenance of existing staff levels and pay in other industry areas. However, he agrees that many smaller companies lacking this safety net will not have been as fortunate.   

Philip Berkowitz is a Council Member of the IBA Global Employment Institute and New York-based US Co-Chair of the Employment Law Practice Group at Littler Mendelson. ‘Obviously, inflation often leads to higher wages,’ he says. This has been happening during what he calls ‘the great resignation’ precipitated by tremendous competition for employees as markets have opened up again as Covid-19 begins to recede.

This will have an impact on those sectors that have come to the fore during the pandemic, such as technology, but also those hit the hardest by it – those ‘badly affected by supply chain challenges and whose wages were otherwise frozen,’ adds Berkowitz. And in addition to hiring costs, he also anticipates that employers will see greater union-forming activities among employees, as social unrest arising from the higher cost of living channels into wage concerns.

Harpreet Kaur Sidhu is Publications Officer in the IBA Corporate Counsel Forum and General Counsel, Corporate Secretary and Privacy Officer at Canada-based company Pethealth Inc – a Fairfax Company. Among other things, the company provides animal management software, RIFD [Radio-Frequency Identification] microchip identification and pet health insurance in North America and the UK.

When it comes to inflation, Sidhu has noted ‘a dramatic jump’ in the starting salaries of – for example – an associate counsel. But she attributes this, in part, to how the remote working precipitated by Covid-19 has consequently ‘made the world a smaller place’. People’s salary expectations aren’t as determinedly bound to where they live as they may once have been.  

Sidhu also says ‘this spike in salary increases’ is occurring because of ‘more accessibility to executive education’ – from Chief Financial Officer to Chief Executive Officer – and professional development online. The higher standard of talent this produces ‘is contributing a lot, because everybody wants to retain the best talent, and that’s hard to do right now’.

And, currently, it’s not even just about the number of zeros in a salary offer. Philip Berkowitz has never seen his clients as focused on reviewing their various compensation practices and other ‘soft’ benefits in order to be as attractive as possible to potential employees and retain their talent base. ‘This is the first time I’ve really seen them bend over backwards to do this,’ he says.

Sidhu echoes this. Her company started to ‘keep on top of what people wanted’ through surveys. ‘For the millennial generation,’ she discovered, ‘it’s about benefits. It’s also: “what perks do I get? What will my bonus structure look like? Do I have the option to invest in stock options?” It’s incentives like that,’ she says.

There are also pressures on companies who instruct outside counsel. ‘We work with two or three firms in every country,’ says Sidhu. ‘Everyone has raised their rates. They’re telling us that they’re struggling to retain the best lawyers and, to do that, they need to up their salaries.’ While firms are sweetening this pill by offering their associates as secondees, ‘it’s gotten expensive’.

Sidhu has gone into the market to see what else is available, ‘but it’s kind of the same story. You have to know somebody to get a good deal or a preferred rate’. One of the consequences, she says, has been a budgetary push for ‘general counsel to keep it in house’. This can lead to the ‘domino effect’ of that general counsel expecting a raise the following year.    

Many of the causes of the current rise in inflation are unlikely to last. Pending a catastrophe, rates will decline. But will there be a lasting impact on hiring? When it comes to bringing in outside counsel, Berkowitz thinks clients will ask ‘how can we centralise work with experts that we know and trust, with cross-border expertise?’

There are strong economic benefits to instructing a firm with offices in multiple jurisdictions, says Berkowitz. Such a one-stop shop facilitates ‘cross-border policies on Covid-19-related issues and returning to work. And the more you can focus multiple projects in one firm, the more you can economise. It’s a basic principle’.

From a company recruitment perspective, ‘employers will start to really look at how many people they need, because it’s going to be expensive,’ says Sidhu. ‘They’re going to demand more work out of one or two people, rather than the ten that were doing one role.’​​​​​​​

And remote working will have an ongoing impact. ‘Companies will put money towards hiring more people and retaining the best talent – not spend it on fancy leasing space or travel costs.’