Wage inflation might spell more expensive employees in the short-term, but it is also racking up future costs in the form of higher end-of-service benefits, also known as gratuities.
End of service pay a concern for companies
Wage inflation might spell more expensive employees in the short-term but it is also racking up future costs in the form of higher end of service benefits, also known as gratuities.
Both Hay Group and Robert Half point to salary increases taking the form of basic pay raised, rather than higher allowances.
An employee's basic pay is used to calculate his or her final gratuity payment. The result is companies are backloaded with provisions for higher payments when the employee leaves. "It's a concern but most companies accrue for it in their accounting every year in terms of outstanding accounts," said Harish Bhatia, a regional manager at Hay Group, a global management consultancy.
Gratuities can be problematic for firms because they represent a liability on a company's balance sheet that is not always budgeted, he added. Nonetheless, a number of financial firms are hoping to convince companies to let them manage the end of service benefit pot on their behalf, said Sara Khoja, a partner at law firm Clyde and Co. This is similar to other countries, where a company's pension scheme is administered externally by an investment firm such as Prudential or Fidelity, among many others.
Serco, a service outsourcing company, this month hired SEI Investments and Ryland Gray to manage its expatriate gratuity scheme.