Germany in 1923, Hungary in 1946, Zimbabwe in 2008, Venezuela since 2016 — recent history offers plenty of examples of hyperinflation. Hyperinflation is defined as a monthly inflation rate of more than 50%, or sudden, rapid price increases on a month-to-month basis.
Currently, one country in particular is dealing with out-of-control inflation: Argentina, where the inflation rate reached 211.4% in 2023.
Argentinians are no strangers to inflation. When the government tied the peso’s value to the U.S. dollar in the late 1990s, it was an attempt to combat hyperinflation that had reached 3,000% in 1989.
This quick fix paved the way for disaster later on, when in 2001, the country erupted into chaos after dollarization decimated government coffers, sent debt spiraling and led to a huge cash drainage that kept average Argentinians from accessing their money.
One of inflation’s most insidious consequences is the crippling effect it has on plans for the future. What is true for now — whether that be a product’s price, the real value of your currency or your purchasing power in the global market — could be very different in the next weeks and months, not to mention years. Given this kind of environment, how can businesses survive, let alone thrive?
And in countries experiencing hyperinflation, how do payroll departments keep up? We spoke with an expert to find out how companies prepare for potential hyperinflation and manage volatile economic environments.
A challenging business environment
Claudio Maggieri, Senior Vice President and General Manager for ADP Latin America, often hears questions like this from clients who are either already established in Argentina or are considering entering the country. While Argentina’s monthly inflation rate seems to be cooling off a bit — the official rate for March 2024 was 11% — the accumulated rate since December 2023 still surpassed 50%. The South American country also suffered rapid increases in monthly inflation rates, as could be observed at the end of 2023 when inflation jumped from 12.8% in November to 25.5% in December.
Ongoing currency fluctuations in Argentina create an unstable business environment. One of the byproducts of the country’s high inflation is a constantly changing exchange rate, in which the Argentinian peso’s value can depreciate very quickly. Efforts to establish a “fixed” or “official” exchange rate gave way to a so-called parallel dollar, also called the “dólar blue,” in which pesos were exchanged on the black market at a more favorable rate.
“So this mismatching creates a lot of impact on businesses,” Maggieri says. Because Argentina’s currency fluctuates so wildly within short time spans, creating reliable forecasts becomes a fool’s errand. Maggieri says his team has resorted to instituting a “flat rate” currency rate for each business year.
“We plan our business performance for each calendar year. For that year, we try to set a flat rate for the local peso value, just to mitigate the impact these fluctuations have on management evaluations,” he says. “But of course, after the year is over, we have to restate everything based on the new currency rate. Whenever we have big fluctuations compared to the exchange rate we are using, we have lots of variances to explain.”
For businesses, this means a lot of additional manual work and retroactive corrections. Cost projections also become increasingly difficult. “It’s hard to accurately project future expenses, including payroll costs,” Maggieri explains. “Whenever we do a forecast — and we do forecasts on a quarterly basis — what would be our assumption for the next quarter?”
Managing salaries in volatile times
Then there’s the issue of managing employee salaries during economically volatile times. “Hyperinflation rapidly erodes the value of a currency,” Maggieri says. “So people in Argentina get their salary and immediately run to the supermarket to buy their groceries, because the prices can change even day by day. This greatly erodes purchasing power.” Because of this, frequent salary adjustments are the norm in countries like Argentina, at least among companies that can afford it.
“This is very hard to administer from a business perspective,” Maggieri says. “A lot of what constitutes a fair salary depends on the industry, the company and the policies.”
Additionally, constant salary adjustments that match inflation are just not sustainable in the long term for some businesses, especially in a country where the minimum wage is just over $200 a month. “This is the reason so many companies are relying on benefits beyond salaries, such as meal vouchers, transportation vouchers, and housing allowances,” he says.
Supplementing a fixed salary can also help balance the scales a bit: “So instead of trying to manage the fixed salary, businesses try to put more emphasis on variable pay components, such as bonuses, commissions, and other payments based on performance metrics.”
Another strategy that’s popular in Argentina is to pay a part of an employee’s salary in a stable currency, such as the U.S. dollar. “Those who can are even paying the entire salary in U.S. dollars,” he says. Of course, this can make things even more complicated from a payroll perspective. “If you decided to pay in another currency, it’s like you’re having two separate payrolls to administer, from a tax perspective.” Payroll professionals need to recalculate the amounts paid in a foreign currency and convert them to pesos, which isn’t simple when you’ve got an unruly exchange rate.
Both of these strategies present significant challenges for payroll teams. “Changes in compensation structure is something very complex because, at the end of the day, you need to rebalance the components of your total compensation, such as fixed salary versus variable components,” Maggieri says. And all of this makes cost projections for things like HR and payroll even trickier.
Strategies for developing resilience
Inflation also leads to a volatile labor market, Maggieri says. Employees look around to find companies that will offer them the best package of salaries and benefits in order to weather the rising prices, often leading to high turnover rates among businesses.
“When it comes to talent retention, it’s really important to establish some mechanisms to bolster the competitiveness of the total compensation you are offering,” he says. It’s important to take a close look at the trends in your sector: Industries where labor unions are strong may be more flexible when it comes to salary adjustments, for example, while other sectors may be more open to additional benefits such as more comprehensive health benefits or transportation vouchers.
Regularly reviewing the competitiveness of your compensation is also key. “In a more stable economy, we do salary surveys to review the competitiveness of our compensation on a yearly basis, or maybe even every other year. In Argentina, we do this on a weekly basis,” he says.
Despite these challenges, Maggieri believes that, with the right strategy and company profile, certain businesses can still flourish in high-inflation environments.
“If you’re in a business where you can’t change your prices too much to offset the cost of salary adjustments, then [regions with high inflation] are not the place for you,” he says. Usually, businesses that work in sectors where there are many competitors have a hard time raising their prices, even in the best of conditions. Areas such as construction or furniture dealers struggle to stay profitable during periods of high inflation.
Sectors such as healthcare, real estate or information technologies might have an easier time navigating these periods. And for those businesses, entering a market like Argentina can be worth it, despite the economic challenges. “Argentina is a huge market,” Maggieri says. “It’s the third-largest economy in Latin America.”
Managing payroll and inflation
ADP’s payroll professionals in Argentina have seen their fair share of economic turbulence. This means they’re deeply familiar with navigating economic uncertainty in times when it seems like every playbook has gone up in flames.
One of the most significant ways in which ADP supports their clients in Argentina is by staying on top of constantly changing legal and regulatory compliance rules. “Regulatory changes around payroll and wages happen a lot in Argentina,” Maggieri says. “In many cases, the changes are applied retroactively.” A common inflation-combating policy includes giving employees income tax benefits that apply to previous pay periods.
“Let’s say the government passes a regulation now, and tells you that you need to recalculate all of your employees’ wages going back to January, and then transfer that tax benefit over to the employees,” he explains. This strategy is meant to give employees a tax break on already received income, and payroll departments need to be prepared to make these calculations accurately in order to stay compliant. In the next month, this regulation could change again.
Navigating regulatory changes and guiding clients through processes like multi-currency salaries, competitive benefits packages, and up-to-date economic insights and compliance knowledge can help businesses in the right sector continue to benefit from Argentina’s potential.
Read more
Sign up to keep up to date with ReThink Quarterly.