Is 10% Salary Inflation Too High? A Perspective on the Offshore Wage Increases | Sherpas in Blue Shirts

Posted On April 16, 2012

For those tracking the global service market, reports of 10-15% salary increases in low-cost countries is almost expected. For executive management not familiar with the offshoring of services, seeing these headlines in the business press is unnerving.

But should it be?

I am not arguing that wage inflation in low-cost countries is equal or lower to high-cost countries, but it is clear to me that those in high-cost countries significantly lack perspective on how to interpret these numbers.

(For a more comprehensive perspective, checkout our webinar on labor arbitrage sustainability or our recent joint study with NASSCOM on Global In-house Center (GIC) cost competitiveness.)

Let’s start with a simple exercise (yes, you can count this towards your daily mental fitness goals).

First, recall your starting salary out of college.

Second, recall your salary in the fifth year of being in the work force (the fifth year is fourth salary increase if you received increases annually). If your salary changed currencies or you jumped to business school, you are disqualified from further playing this game.

Two numbers…now divide the fifth year salary by the first year to get a ratio (this should be greater than 1.0 and generally less than 3.0).

Now compare against the table below to get the annual percent increase in your salary across those five years. For example, if the ratio is 1.5, then the average annual increase was 10.7%.

RatioAnnual % increase
1.000%
1.255.7%
1.5010.7%
1.7515.0%
2.0018.9%
2.2522.5%
2.5025.7%

 

Most people find the annual percent to be higher than they expected. And often surprisingly close to the typical reported increase in offshore salaries.

Why? The perspective that most people miss is that the growth in salary for an individual is different than pure salary inflation. Salary growth of an individual reflects both pure salary inflation (what an entry-level developer will earn) and the impact of their career progression (being able to deliver more value). In other words, salary growth also reflects being paid more for playing a slightly more valuable role – even if that does not include a formal promotion.

This picture becomes even more skewed if you consider total compensation (salary and bonus), which tends to grow even faster early in a career.

Many of you are probably now thinking, “Wait, my salary has not been growing that fast recently!”

True – and salary growth in percentage terms slows as individuals reach 10, 15, and 20 years into their careers. Much of the growth in salary in the early portions of the career is due to steady progression in being able to play a more valuable role – taking greater ownership, requiring less quality review, increasing domain knowledge, and other factors. But the benefit of further increasing these skills diminishes beyond a certain point, and salary growth is then predicated on other factors such as impact, leadership, and overall labor market rates for fully developed skills.

These same things are at play in offshore labor markets and much of the labor force is in the first 5-10 years of their careers due to the labor pyramid – so much of the workforce should be seeing “high” salary increases. At more senior roles, salary increases tend to moderate on a percentage basis.

Give this exercise to others – and potentially to that executive who feels 10% salary inflation is far different than what happens in the United States.

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