Salary increases for employees in most markets across Asia Pacific will be lower in real terms next year despite a rise in average salary budgets from 2015, owing to growing inflationary pressure. This is according to new research released by leading global professional services company Towers Watson.

Salary budgets in the region are set to rise 6.8% in 2016, slightly higher than 6.6% in 2015. But once inflation is factored in, average increases will be 3.4% next year, compared to 4.1% this year. In 17 of the 22 Asia Pacific markets covered by the survey, employees will go home with less money next year. Average inflation in 2016 is forecast to grow at 3.4%, up from 2.5% in 2015*.

The Towers Watson 2015 Asia Pacific Salary Budget Planning Report looks at salary increases across job grades from factory shop floor to executive suite. It helps to understand the salary movements across various sectors and markets and provide companies with guidelines for their annual salary forecasting process.

The report focuses on a number of key industries, including automotive, chemical, financial services, energy and natural resources, high technology, media, professional services, retail, pharmaceutical and health sciences, and fast moving consumer goods.

“What we’re seeing are companies adopting existing practices – such as the percentages of the previous year – as a benchmark for the coming year,” said Sambhav Rakyan, Data Services practice leader, Asia Pacific at Towers Watson. “Companies need to be smart about how they use limited salary budgets, because high volatility and talent crunches are causing frequent shifts to pay. Determining current pay rates for jobs in Asia Pacific’s highly competitive talent market is akin to shooting at a moving target. What companies pay for a job today might be different tomorrow, and if managers don’t keep an eye on the market, they could risk losing valuable talent to the competition.”

Salary Raises Out of Synch with Inflation

In East and Southeast Asia, the biggest overall increases for 2016 will be in Indonesia (9.4%), Vietnam (10.4%) and mainland China (8%) all higher than last year. However, once inflation is taken into account, real increases in these countries drop to 3.9%, 5.6% and 5.8% respectively. At the other end of the scale is Japan, where the overall increase is expected to be 2.4% or 0.9% in real terms.

The contrast between Hong Kong and Singapore is stark. It reflects the persistent inflationary pressures in Hong Kong. Inflation in Singapore next year (1.5%) is forecast to be far lower than in Hong Kong (2.7%) and that’s reflected in the real increases. Overall salary budgets in these two locations are projected to be similar, with Singapore being 4.4% and Hong Kong being 4.5%.

“One can argue that historical measures aren’t accurate, particularly in Asia where high volatility is almost the norm, but there’s a positive side too,” said Rakyan. “Facing the challenge of rising inflation and cost, employers are taking more strategic approaches to retaining talent by offering an employee value proposition that’s more creative and flexible – for example, benefits options to which employees can more readily relate and appreciate. Sometimes it’s simply recognising where employee mindsets are for percentage raises and accommodating them.”

Employers less Upbeat on Business Outlook

The projected higher overall salary increases are despite the fact that employers in the third quarter are significantly less upbeat on the business outlook for the region than they were in the first quarter. Those with a positive outlook shrank to 33% from 57%.

“Employers may be bearish in thinking there is a weak business outlook given the current poor market data, but the case is the opposite for employees, who hold bullish expectations for salary rises. This mismatch in belief tells us there isn’t always a positive correlation between economic sentiment and staff expectations. Employers will need to carefully and proactively manage employees’ longer term expectations, if they are to achieve a harmonious and content workforce.”

The third quarter survey results show a similar trend to those of the first quarter in terms of higher increases going to top performers.

The latest research shows that across employee levels, the top performers get higher increases averaging 7.7%, while “above average” and “average” performers get 6.9% and 6.1% raises, respectively. A similar trend is evident in the three core industries in the survey: financial services, technology and healthcare/pharmaceutical.

“To reward employees based on their performance offers them a great incentive and also reflects growing market maturity. It also shows the rising competition for talent,” Rakyan added.

It is crucial for employers to have a good evaluation system and a transparent communication plan to help employees understand their value within the organisation. “Organisations need to have open lines of communication about pay, and take an active role in helping employees understand the rationale behind pay decisions,” said Rakyan.

High Tech Salaries Rise Fastest

Employees in the high-tech sector are set to enjoy the biggest salary increases, compared to their counterparts in the other industry sectors covered by the report. Increases in this sector will average 6.5% in 2016, the same as in 2015. The highest tech-sector increases will be in Pakistan (12%), India (10.7%) and Vietnam (10.6%), although these percentages are before inflation is taken into account.

In the region’s two international hubs, Hong Kong and Singapore, tech-sector salaries are set to rise by more than last year: up 4.5% and 4.3% respectively, compared to 4.4% and 4% in 2015. In mainland China, tech-sector salaries are expected to rise by 8% next year, versus 7.7% in 2015.

“The popularity of new technologies, such as wearable devices, cloud computing and enterprise application software is expected to keep growing,” said Rakyan. ”This drives the demand for talent in the high-tech sector and explains why the sector sees the biggest increases. In fact, technology also plays a role in the growth of the pharmaceutical and financial services sectors when you consider, for example, how the healthcare industry is embracing wearables and the rapid growth of internet finance.”

Salaries in the pharmaceutical sector across the region are forecast to rise 5.8% in 2016, higher than 5.5% this year. However, in financial services, although the percentage increase for 2016 is, at 6%, higher than in pharmaceuticals, the overall increase will be down slightly. In 2015, it was 6.1%.