Salary increases are inescapably linked to inflation; where inflation is one of the most important determinants when deciding on the amount of the salary increase. Other factors must also be taken into consideration such as financial constraints of the employer, growth rates in the country and general market and/or economic conditions.
The next consideration is to determine a “real increase”. A real increase is defined as the increase after inflation has been considered. As an example, if the salary increase is 6.0% and inflation is 5.0%, then a 1.0% real increase has been granted.
Future inflation is usually employed as this more accurately compensates the employee for the expected ravages of inflation and the negative effect on their purchasing power in the new year- rather than historic inflation.
While this is undoubtably the correct methodology to derive a scientifically formulated salary increase which is equitable to all stakeholders, inflation forecasting errors do occur. Inflation in African countries is notoriously difficult to predict for the primary reason that it is extremely sensitive to two important drivers namely, local currency and food prices. The foreign exchange markets in African countries are illiquid and thus any depreciation in the currency tends to be over exaggerated with the consequence of higher imported inflation. Further, food prices are constantly influenced by bad harvests and adverse weather conditions.
Given this, before one commences with the new salary increase exercise, it is prudent to look in the rear-view mirror to ascertain the actual “real salary increases” employees received the previous year. In the table below we have calculated the average 2023 inflation rate for selected countries, together with the Axiomatic recommended salary increase for 2023 which we suggested in January 2023. The final column displays the real salary increase or decrease:
Represents Axiomatic’s forecast
Clearly, employees in Ethiopia and Ghana received a significant negative real increase in 2023. Employees in Angola and Zambia were also negatively affected by unexpectedly high inflation albeit to a lesser extent.
While the normal practice is not for the employer to “make good” the negative real salary increase in 2024, cognisance should be taken of the erosion of the Ethiopian and Ghanian employee’s net pay in 2023, if possible.
In addition, we have significant experience integrating the payroll platform with SuccessFactors, Workday, and other related systems.
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