Non-Stop Bad news: Bad news for salary increases in South Africa

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South Africans are currently some of the most indebted people in the world, but the challenging economic environment may make it harder for employers to give salary increases above inflation.

Given the economic strain and companies under pressure, workers should not expect above-inflation salary increases this year – and the pressure will likely be on for the foreseeable future.

According to Kirk Kruger, a member of the South African Reward Association, 73% of disposable household income in South Africa is used to service debt repayments.

“We find ourselves in an environment of rising interest rates, high levels of unemployment, and escalating food and energy prices. Many people are facing extraordinary financial headwinds and struggling to service their debt on home loans, vehicle loans, credit cards and overdrafts,” Kruger said.

Many South Africans are also using informal credit arrangements with higher interest rates, painting a bleak picture for the average person, even if they are employed,

“In desperate times, employees may look to their employers to award salary increases well ahead of inflation to help them make up the monthly shortfall which occurs when debt repayments start to dominate monthly spending,” Kruger added.

Determining salary increases

South African companies have historically awarded salary increases above inflation over the last two decades.

However, this was not the case in 2008 – when the global financial crisis hit – and in 2022 – when Covid-19-induced supply chain disruptions and pent-up consumer demand pushed inflation.

Companies also use a combination of factors outside of CPI when awarding salary increases. Kruger said that these include:

Market salary movements – The actual and anticipated salary increases in the general market and the specific sector in which the company operates.
Market position of employees – If a company has lost ground to their peer market in terms of overall market position, it may need an extra increase in budget to strengthen the position.

Key skills – In a competitive market, where key skills are hard to come by, a company may need to allocate additional budget to retain the skills critical to success. A business which employs a high proportion of knowledge workers may need a higher increase budget because the skill set they employ is receiving above-average increases in the market.

Impact of union negotiations – One of the roles of a trade union is to negotiate competitive salary increases for their members. There are times when a company will need to exceed the budgeted salary increase because of potential industrial action, which could lead to lost production and loss of income for employees.

Company affordability – The salary bill of any company makes up a significant portion of operating expenditure. As with a personal budget, a healthy company budget will plan to have income exceed expenditure. The salary cost will need to be managed within set parameters, and this may mean that a company cannot afford to award the level of increases in the market.
Company performance – Salaries are a fixed cost. Once an increase is awarded, the cost is locked in for the future. The only way of “undoing” this would be to retrench employees, and this would be a last resort for a company. If a company is performing well and has a positive outlook for the next three to five years, the Remuneration Committee may be more inclined to award competitive increases than if the company is struggling to meet its targets.

Individual performance – In a pay-for-performance environment, one would expect high performers to receive a higher portion of the increased budget. There are times when a significant portion of the increased budget is not available for performance-related increases due to union settlements or a lack of managerial willpower to significantly differentiate increases. The additional budget may then be required to reward the high performers, and this will increase the overall cost.

In addition, Kruger noted that employers also may use CPI forecasts from reputable firms, as most CPI data is backwards-looking.

Several financial services companies have CPI forecasts, and by looking at a few forecasts, an employer will have a good idea about what will happen with inflation in the short- to medium-term future.

Huge problem

With the South African Reserve Bank (SARB) hiking interest rates to counter inflation, South African consumers are spending far more on servicing their debt.

Kruger said that South Africans have two options amidst the challenging economic environment:

Cut expenses so that more disposable income is available to service debt.
Try to increase their income.
Although moving jobs may be an easy way of boosting pay, not every South African will be able to find such a position amid the difficult job market.

Employees will thus be hoping for annual salary increases that are above inflation, with unions expected to ask for double-digit increases to give their members additional relief.

However, employers have not been immune to the challenging economic environment.

“Interest rates have risen dramatically in the past two years, but it is unlikely in the short-term that annual increases are going to be far ahead of inflation,” Kruger said.

“The economic impact of Covid-19, load shedding, societal unrest, and rising input costs have left many organisations as buffeted as their employees. Ultimately, company affordability and overall company prospects will be the biggest drivers of salary increase budgets in the foreseeable future.”

Source: https://businesstech.co.za/news/finance/721034/bad-news-for-salary-increases-in-south-africa/

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