“Mary, what salary increase forecast should we incorporate into the 2019 budget?” This question strikes terror into any HR management team and is a clear indication that the salary increase cycle has commenced in earnest.
Unfortunately, in order to forecast next year’s annual salary increase, some predicting is necessary. As we all know, with any forecast comes an element of uncertainty – the forecast could either be spot on (lucky) or could miss the mark entirely (wrong). However, this shouldn’t be reason to panic – as we have always said to clients -it is entirely possible to conduct this analysis in a manner which results in a forecast that is scientific and defensible.
Salary increases are inexorably linked to inflation, where inflation is one of the most important determinants when deciding on the amount of the salary increase. Cognisance must be taken of the fact that inflation in South Africa is notoriously difficult to predict for the main reason that the currency exerts a significant influence on inflation. This inter-dependency highlights the difficulty with forecasting an equitable salary increase for employees.
Despite this complexity, there is a robust method by which to devise an informed and scientifically formulated forecast, which can be employed during the budgeting process.
The departure point is to forecast the future inflation rate. The table below details South Africa’s historic inflation rates and depicts the future inflation rates forecasted using Axiomatic’ s inflation model:
Our 2018 inflation forecast is aligned with the forecast of the Monetary Policy Committee (“MPC”) who are expecting inflation to average 4.8% in 2018. The MPC stated at their September 2018 meeting that they expected inflation to average 5.7% in 2019; our forecast is slightly lower at 5.5%, although we do agree with the MPC that inflation will peak at 5.9% in Q2 2019.
There is little doubt that currency weakness will result in higher inflation in 2019 primarily through increases in the fuel price. However, our lower inflation forecast is predicated on the assumption that fiscal conservatism will be implemented by the new Finance Minister and that low growth will constrain suppliers’ ability to pass on higher input costs to consumers.
Having now determined the average expected inflation rate for 2019 at 5.5%, the final step in the process is to establish the quantum of the “real increase”. A real increase is defined as the increase after inflation has been taken into account. As an example, if the salary increase is 7.0% and inflation is 5.0%, then a 2.0% real increase has been granted. The table below illustrates the real increases granted by South African companies over the last 15 years:
The historic methodology adopted in South Africa, when determining an equitable salary increase, has been to add a 2.0% real increase to the forecasted inflation figure. The data presented above supports this “rule of thumb” method, given that over the last 15 years the average real increase granted by companies was 1.7%.
However, some degree of interpretation and qualitative analysis must be introduced into the “scientific” process. There has been a discernible trend over the last few years of lower real salary increases being granted. This trend can be attributed to lower GDP growth, declining consumer spending, political uncertainty and the resulting low level of business confidence.
Perhaps the first and most significant indicator of the emergence of this trend, was the 2015 agreement between COSATU and the government in respect of public sector salary increases. The final agreement was that from 2016, salary increases would be set at inflation plus 1% for the ensuing two years. The next year IMATU, the Independent Municipal and Allied Trade Union, agreed that for the period February 2016 to January 2017, salaries would increase by inflation plus 1%. The “new normal” real increase of 1.0% is fast becoming entrenched in South African remuneration policies. This assertion is corroborated by the fact that in May 2018, public sector employees were granted an increase of 7.0%, increasing in the 2nd and 3rd year by inflation plus 1.0%. Further, the SA Clothing and Textile Workers Union negotiated a 7.5% salary increase which would escalate by inflation plus 1.0% in the 2nd year.
This does, on the surface, appear to demonstrate that there is a level of understanding of business affordability which is being considered in union negotiations. We contend that in the private sector, business affordability constraints will dictate that the historic “rule of thumb” real increase of 2.0% is a vestige of the past, and that the new normal real increase is 1.0%.
Having contemplated the previous statements, one can now forecast the projected salary increase for 2019:
Considering the question asked of Mary – she can now confidently reply – 6.5%.
It is obviously too early in the salary increase planning cycle to definitively decide on a final salary increase for 2019. Further, we have stated that South African inflation is difficult to predict, and forecasts can change significantly on the back of incoming data. Given this, we will continue to revise our projections over the coming months. To ensure that you stay well-informed, please email us at email@example.com so we can send you regular updates.
To read last year's forecast click here: http://www.axiomatic.co.za/news/salary-increases-for-2018/