When there is a sudden increase in inflation, one of the acceptable, well established and dependable Rewards tools available, is the introduction of an inflation allowance (“IA”). The salient advantage of an IA is that it does not increase fixed employment costs in perpetuity; rather, it recognises that the current high inflation rate is temporary and transient.
The mechanics of an IA are simple:
Cognisance must be taken of the fact that when most companies determined the 2022 salary increases at the beginning of the year, inflation was 5.7%. However, the consensus at the time, including the forecast by the Monetary Policy Committee (“MPC”), was that inflation would drift down during the year and average between 4.5% and 5.0% for 2022. Adding the “new normal” real increase of 1.0%, many companies granted salary increases of between 5.5% to 6.0% for 2022.
The table above clearly illustrates that inflation did not fall and continued its upward trajectory to reach 7.4% in June 2022. Our forecast average inflation rate for 2022 is 6.6% which is closely aligned with the MPC’s forecast of 6.5%.
Assuming we are correct, essentially this will mean that employees will receive a negative salary increase in 2022 of (1.1%) if a 5.5% salary increase was granted or (0.6%) where the employee received a 6.0% salary increase.
There is little doubt that employees in South Africa are under severe pressure to make ends meet. A Household Affordability Index, compiled by the Pietermaritzburg Economic Justice and Dignity Group in July, highlighted the rising cost of food in the country.
The Great Resignation is no longer an esoteric term coined by Texas University’s, Anthony Kotz. It is real and it is here. The pandemic has meant that many employees have been working remotely and this has afforded them the rare opportunity to revaluate their lives, priorities, values, circumstances, career choice, and most importantly, their employer.
While the number of resignations in the US and some other developed markets is alarming, South Africa has not escaped the Great Resignation – several of our clients have expressed concern that staff turnover is at record levels and they are struggling to attract and recruit top talent. US Labour economist Lawrence Katz calls the Great Resignation “a once-in-a-generation ‘take this job and shove it’ moment” – which gives employees a once-in-a-generation upper hand.
Given employees’ tenuous financial position, the Great Resignation, and the fact that employees, in general, have received a negative salary increase this year, we are of the opinion that employers should consider introducing an IA.
We would further suggest that a base inflation rate of 6.0% be used. The IA would thus only be paid if inflation is greater than 6.0% and the amount of the IA would be the difference between the latest inflation rate and 6.0%.
If our forecasts in the above table are correct, then:
The introduction of an IA will bolster, augment and improve the Employee Value Proposition (“EVP”). Employees will realise (and appreciate) that the employer understands the increasing cost of living pressure and is prepared to assist. This decisive action – ensuring employees do not receive a negative salary increase- will hopefully furnish the company with a tangible Return on Investment because it will reduce staff turnover, improve the EVP and mitigate the high cost of recruiting new employees. Further, it may facilitate higher productivity.
In addition, from the employer’s perspective, the mechanism ensures that high fixed employment costs are not entrenched in perpetuity; rather only some temporary relief is afforded to employees.
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