BENEFITS &
COMPENSATION
INTERNATIONAL
T O TA L R E M U N E R AT I O N A N D
PENSION INVESTMENT
Compensation and Benefit Trends
in the Russian Federation
Karina Khudenko
Karina Khudenko is a Partner with the Human Resource Services department at PwC Russia. She
specializes in individual taxation and HR consulting, advising multinational and Russian clients on
the most efficient types of employee remuneration. In her 20 years at PwC Russia, she has advised a
significant number of multinational companies on the options for setting up in business in Russia,
employment and secondment and approaches to remuneration and incentive plans. Ms Khudenko
has a PhD in Labour Economics and runs taxation and HR programmes for the Economics Faculty of
Lomonosov Moscow State University.
rate from 2000 to 2008, they also grew
respectively in US dollar, euro, etc.
equivalents as well.
For a large number of multinational companies working
in such sectors as FMCG*, energy, pharmaceuticals and
automotive, Russia has been among the most important
emerging markets, with significant growth potential;
being among the growing territories, Russian
subsidiaries of multinational companies have been
placing a special focus on managing local workforces.
For almost a decade, up until 2008, the Russian
market was marked by rapid GDP† growth, sweeping
changes in various industries, the heating up of
the labour market and an increasing shortage of
skills. However, despite recent economic deceleration
and consumer resistance in such industries as financial
services and car manufacturing, the labour market
is still experiencing a noticeable shortage of
resources while the competitiveness of compensation
packages remains a key issue in recruitment and
retention. This article looks into the main characteristics
of the Russian labour market and reviews data on
changing policies for compensating managers and
employees.
Certain changes in salary growth took place after 2009
and, although growth continues, fluctuations in salaries
and in the variable part of remuneration have become
much more segmented, depending on industry and
specific position. For example, according to my firm’s
2013 salary survey, the aggregate income of mid-level
management grew by 15.4%, while for employees
income grew by only 5.4% (which, given the rate of
inflation, is in fact a reduction in purchasing power for
the latter).1
When comparing average Russian salaries with those of
other countries, it is obvious that, despite a serious
increase in revenues in the last 15 years, the average
salary in Russia remains low versus those in the leading
world economies. FIGURE 2, also overleaf, compares the
average Russian salary with those of several European
countries. FIGURE 2 shows that employees’ salaries
continue to be low, especially considering the quality
and professional skills of the workforce – their
qualifications and education, on average, remain high.
According to Rosstat, at present the share of the
population with higher education (including retirees) is
23% and, among people born between 1981 and 1985,
those with higher education account for 37%. Compared
with other emerging markets, the Russian labour market
is characterized by the availability of a highly skilled
workforce, still with comparatively low salaries. In other
emerging markets, the share of young people with
higher- or secondary-level professional education is
growing, though it still remains quite low compared
with Russia.
WHAT SALARY SURVEYS SHOW
The 1998 economic crisis was triggered by a default on
Russian government debt. However, this was followed
by a fairly quick recovery and a decade of rapid
economic upturn, accompanied by substantial growth
in personal incomes in general‡, and salaries in
particular.
FIGURE 1 overleaf shows year-by-year growth for salaries
in Russia between 2000 and 2013 (as reported by the
Russian Federal State Statistics Service, Rosstat). Actual
annual salary growth was in double figures, making both
annual salary indexation and continuous monitoring of
the salary market necessary tools for keeping
compensation packages competitive. Unlike in the
1990s, when salaries in foreign companies operating in
Russia were largely set in US dollars, in the 2000s this
practice only remained in some companies and usually
just in respect of the salaries of particular executives.
Today, we are therefore looking at salaries denominated
in roubles and their growth has been significantly
affected by ongoing high inflation rates (in recent years
reaching at least 6-7% annually). Nevertheless, salaries
outpaced inflation and, more importantly, considering
the fairly stable (and increasingly so) rouble exchange
* fast-moving consumer goods
† gross domestic product
‡ The population’s growing prosperity was also a result of
increasing social benefits (State pensions and other
allowances) which are not examined in this article.
1
Average Annual Wages in Russia (2000-13)
FIGURE 1
Rbs
35,000
29,960
Average annual wage
30,000
26,629
25,000
23,369
20,952
20,000
17,290
18,638
15,000
13,593
10,634
10,000
8,555
5,000
2,223
3,240
4,360
2001
2002
6,740
5,499
0
2000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
Source: Accrued Average Monthly Wages of Employees of Organizations, Russian Federal State Statistics Service, 2014
Comparison of Average Salaries in Various European Countries vs. Russia
FIGURE 2
€
70,000
59,157
Average annual salary
60,000
55,627
50,000
45,215
41,895
40,000
36,890
35,000
34,500
38,681
35,947
30,000
30,000
20,000
11,070
0
9,918
7,859
10,000
11,852
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NOTE: Amounts are in euro.
Source: ‘Personal income tax in the European Union’, PwC, 2013, and Russian Federal State Statistics Service, 2014
Comparison of Base Salary in Moscow with those of the Largest Cities in Russia
FIGURE 3
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Source: ‘PwC Russia PayWell Salary Survey 2013’
2
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Another important feature of the Russian labour market
is that, although revenues for all grades of employee
have grown, salaries of top managers have increased
even faster. This has led to an increasing divide between
the salaries of entry-level and senior employees,
while the salaries of top managers in large companies
have already reached European and US levels and
sometimes even exceed those of similar employees
throughout an industry, e.g. financial services. This
situation is the result of a sharp increase in top
management’s remuneration in the 2000s in many large
Russian companies and the remaining significant
shortage of professional executives among Russian top
managers.
The only virtually mandatory benefit included in
the employee packages of office employees in Moscow
is voluntary medical insurance. It is important to note
that medical services in Russia remain largely free of
charge for the general public. Outside Moscow and
among small and medium-sized businesses, for instance,
medical insurance is still uncommon and is considered
to be something of a privilege, since employees
can receive free State medical assistance even
though it is not always of a very high quality.
However, in Moscow medical insurance is a standard
benefit for all types of employee. According to the
‘PwC Russia PayWell Salary Survey 2013’, all survey
participants provided their employees with medical
insurance. Notably, most employers do not offer
different insurance policies to different employee
groups. Nonetheless, in a few years we can expect
demand for premium medical insurance to grow among
top managers. This may include medical examinations
and treatment abroad, among other features.
MOSCOW AND THE REGIONS
The substantial difference between compensation
packages provided in Moscow and those in other cities
is an important characteristic of the Russian labour
market. Variations in salary levels do not always
correlate with current regional differences in the cost of
living and price levels, but largely relate to the supply of,
and demand for, skilled labour.
Talking about other types of employee insurance, it
is worth mentioning that there is a visible difference in
the provision of life/disability insurance between
Russian and multinational companies – the latter group
includes this benefit in the package much more
frequently, whereas for Russian companies the provision
of life/disability insurance is still quite uncommon. On
average, around half of employers (based on the
PwC 2013 salary survey) offer basic life/disability
insurance to their employees. In the absence of
life/disability insurance coverage, many Russian
employers provide some sort of financial assistance
for their employees in the case of accidents (and
there are even tax exemptions for such types
of compensation) but payment of this kind of assistance
would usually be discretionary. In future, we
expect growing demand for employee life/disability
insurance driven by employees (at least in the whitecollar segment of the market) as they become more
educated about insurance products and more
sophisticated in their expectations of the compensation
package.
FIGURE 3 opposite illustrates salary variations between
Moscow and 13 large Russian cities in 2013. In recent
years, the differences between Moscow and some of
these cities have tended to decline. For instance, the
index for St Petersburg grew from 59% in 2010 to 87% in
2013. However, the high concentration of businesses in
Moscow will continue to drive its leadership in respect
of remuneration levels.
The stark remuneration differences existing across
Russia make it difficult for companies operating in
various regions to plan employee travel and develop
respective compensation packages. Redeploying
employees from Moscow to other regions is one of the
hardest tasks since employees expect their
compensation package, which is structured for the
Moscow market, to improve. They also expect
additional compensatory payments to be made owing
to their relocation. This creates a huge divide between
the salaries of redeployed employees and the local
market.
So-called ‘status benefits’ included in compensation
packages also play an important role. Such benefits
include a corporate, business-class or luxury vehicle
with a driver and business-class airfares for business
trips. Many foreign companies must take this
into consideration. Russian companies take a more
liberal attitude towards the benefits of their top
executives working in head offices and, as such, these
managers of foreign companies in Russia might feel a
certain discomfort in relation to their peers in domestic
companies.
It should be noted that domestic staff mobility in Russia
is very low (due to several historical and cultural
factors), which is also one of the reasons for the vast
difference in salaries of the same professionals working
in various regions.
WHAT ABOUT BENEFITS?
After reviewing the compensation policies of
Russian employers and the demands of job applicants,
it is evident that the key element in any compensation
package is the monetary part provided as guaranteed
salary and annual bonus. Benefits play a secondary
role in the compensation package and their absolute
and relative value remains insignificant (rarely do
benefits total more than 10% of aggregate employee
compensation). However, in developing their
compensation packages, employers must take
note of certain specifics and trends pertaining to
benefits since, for many employers, a competitive
social package with other non-monetary elements
can always act as a decisive advantage in the
market.
A meal allowance is one of the remaining features of
benefits and social packages (usually provided through
subsidized cafeterias located in office premises).
Furthermore, in many conventional Russian companies,
catering services in manufacturing plants and offices
are not outsourced and are, instead, a company unit
or department. Russian companies, which had emerged
from Soviet enterprises, still have kindergartens and
recreational and sports facilities in their infrastructure.
Even those companies that disposed of their non-core
assets and social structures in an effort to improve
efficiency in the 1990s have recently been focusing
3
more on expanding their social infrastructure.
Companies understand that such services give
them a competitive advantage in the job market
and reflect their commitment to being socially
responsible.
benefit policies in other countries do not extend this
practice to cover Russia.
PENSIONS? WHAT PENSIONS?
– the insubstantial weight of benefits in the overall
remuneration package, combined with the small
number of companies providing a variety of
benefits,
There are some other reasons why flexible benefits are
not popular. I believe the main deterrents are:
Corporate pensions constitute one of the clear
differences between the Russian and international
approaches to structuring compensation packages.
Russian corporate pension programmes are rather
immature, since the first programmes appeared
in the early 1990s as the respective laws on
Non-State Pension Funds were passed. Historically,
the State was responsible for paying pensions in
Russia and the State pension system has been
‘pay-as-you-go’ so far. However, after pension reforms,
State pensions were supplemented with insurance
and individual accounts (which are still being reformed).
The ongoing reform of the State pension system
and annual developments in pension contribution laws
may have been factors hindering the development of
corporate pension programmes, as the mandatory
payroll burden was rather high for employers and, in an
environment uncertain about the further progression of
pension reforms, many employers could not decide
whether to create a corporate pension pool, which
obviously has long-term implications for companies.
– the existence of tax and legal restrictions preventing
the provision of flexible benefits for employees,
and
– the complex administration of flexible benefits with
low demand on the part of employees for such
benefits.
While the use of flexible benefits is low in terms of
popularity, once implemented such approaches can
help employers become more visibly differentiated in
the market. This is especially important for employers
hiring various groups of employees – differing in
age, gender and professional characteristics – with
varying needs and aspirations. When their programmes
meet the needs of various employee categories (age
being the most explicit differentiating factor in Russia),
companies can achieve a significantly higher degree of
employee satisfaction as regards social packages while
maintaining salary levels. However, in order to obtain
such results, employers must thoroughly understand the
needs of their employees (by conducting satisfaction
surveys) and take advantage of technological resources
(IT platforms) that can help to reduce administrative
costs.
As a result, less than 20% of employers representing
multinational companies now have corporate pension
plans in place (according to PwC salary surveys2 and
other sources). Corporate pension programmes are
likely to become more common for Russian and
multinational companies in the coming years owing to
such drivers as:
BRINGING EXPATRIATES TO RUSSIA
– the rising average age of employees and thus a
growing interest in corporate pensions as an
element of the compensation package,
Many multinational companies still need to send
expatriates to Russia. It is important to note that
Russia (and especially Moscow) continues to be one of
the most expensive destinations for employers in terms
of the compensation package for expatriates.
Hardship allowances that were generously paid out
by employers in the first decade of expatriate
secondments to ‘far off and frozen’ Russia have been
substituted by compensation packages strictly tied to
the value of additional living expenses where the cost
of accommodation and children’s education remains
the most material. The other material cost items are
the provision of a car with a driver, home-leave
expenses and compensation for travel costs for
commuters whose number is growing both in Russia and
globally.
– the substantial gap that exists between average
salary, especially at managerial level, and State
pensions, and
– projected tax benefits for corporate pension
plans.
An interesting feature in establishing corporate
pension programmes in Russia is the prevailing reason
why employers are eager to propose such benefits,
i.e. corporate social responsibility as a reason for
establishing a corporate pension plan in at least 50% of
cases, which is more important than retention, according
to my firm’s 2011 pensions survey3. Another positive
finding is that over 80% of companies with pension
programmes in place consider these to be an efficient
tool for motivation and retention, and thus value it
highly.
When thinking of ways to make Russia a more desirable
destination for expatriates, it is important to note
the existing favourable migration regime in place
to attract foreign professionals to Russia, according
to which foreign nationals eligible as Highly Qualified
Specialists are guaranteed a low income tax rate
of 13%, with a social contribution exemption granted
to their employer. This latter fact makes it
more advantageous for employers to attract highly
qualified foreign specialists willing to work in Russia
on a local compensation package, i.e. without
any additional compensation paid, than to hire a
Russian local, as an employer can save up to about
BEING FLEXIBLE
One of the most paradoxical practices of the Russian
remuneration market by employers is the minimum
(sometimes a single case) take-up of a flexible benefits
policy. According to PwC surveys, the number of
companies using single benefit systems is only 5% of
total market players. Moreover, even those
multinational companies that extensively use flexible
4
US$14,000* in social contributions for each US$100,000
of annual gross income, while the transaction costs to
obtain permits for foreigners are quite low. As incomes
of top managers in Russia are equal to those of their
peers in most countries in Western Europe (and even
higher in many sectors) and income tax is at the
minimum level, employers in Russia should find it easy
to attract foreign managers to occupy vacant positions
in such a favourable environment. This trend was
evolving rapidly before 2010. However, the number of
foreign specialists has been decreasing both in foreign
and Russian companies since then. Evidently, this
trend should be studied and analysed as a separate
and rather interesting feature of the Russian labour
market.
SUMMARY
In closing, flexibility and fast responses to the constantly
changing environment of the labour market (salary
levels, deficits for certain professions, legal and tax
developments and the ability to make prompt decisions)
are critical for the success of remuneration policies
applied by companies in Russia. The time taken
for decision-making is one of the areas where
multinational companies sometimes lag behind
Russian employers as review and approval of changes
in policies often take weeks or even months,
whereas local competitors make prompt decisions
and often override their official policies, which
gives them an advantage in, for example, negotiations
with prospective employees. However, multinational
companies have significantly influenced and are
still shaping Russian remuneration practices, bringing in
the best approaches for developing incentive
programmes along with transparent and fair
remuneration to the local market. This is definitely a
favourable driver for fostering further development of
the labour market.
Ω
* £1 = US$1.61; €1 = US$1.26 as at 10 October 2014
References
1 1 ‘PwC Russia PayWell Salary Survey 2013’.
1 2 PwC salary surveys, 2006-13.
1 3 ‘Pensions Survey 2011’, PwC Russia, 2011.
Copyright © Pension Publications Limited 2014.
Reproduced from Benefits & Compensation International, Volume 44, Number 4, November 2014.
Published by Pension Publications Limited, London, England.
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