Sunday, November 6, 2011

Pay increment vs inflation

This is a simple post to explain the effect on how inflation affects pay increment. I will first start with a scenario. There was a new company which had four workers. The boss of the company paid each employee $100 per month as salary.

After working for a year, four workers requested a pay raise for their hard work. The boss agreed to the request and decided to give a raise based on the performance of each employee as shown in the below table.

The question now is should all the employees be happy with their pay raise assume that the inflation rate is 5%? We can easily found out the answer by using the simple formula as shown below.

Real % change in salary due to increment and inflation =

% change in salary - inflation rate =

[(New Salary - Old Salary) X 100 / Old Salary] - inflation rate

After using the formula, the result is tabulated as shown in the table below.

For the table, well as long as % increase in salary is less than inflation rate, there will be a pay reduction in real value. Hence worker A and B in fact had their pay reduced in real value.

1 comment:

Createwealth8888 said...

It is never the responsibility of our employers to pay us enough increment to offset inflation.

It is solely our own responsibility to offset the effect of inflation through successful investing.

Have you started your journey towards financial freedom?