This question strikes terror into any HR management team as it is a clear indication that the salary increase cycle has commenced in earnest. Our past notes on the subject have always reiterated the same advice – don’t panic – it is possible to provide Mike with a percentage derived in a scientific manner which results in a salary increase forecast that is logical, cogent 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 interdependency 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:
Represents Axiomatic Forcasts
Our inflation forecast of 4.7% for 2020 is lower than the projection of the Monetary Policy Committee who at the September 2019 meeting, stated that they expect inflation to average 5.1% in 2019. It is however aligned with several economists.
The next process in the scientific methodology, 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 6.0% and inflation is 4.0%, then a 2.0% real increase has been granted. The table below illustrates the real increases granted by South African companies over the last 17 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 17 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 assertion is corroborated by the 5-year moving average in the graph above, which has been steadily declining in recent years. This trend can be attributed to lower GDP growth, declining consumer spending, political uncertainty and the resulting low level of business confidence.
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.
Therefore, the scientific process would conclude a 5.7% increase for 2020:
However, before a final decision is made, cognisance must be taken of two factors:
- 2019 Budget: The Budget had serious implications for employee’s net take home pay:
- The Budget did not increase the income tax brackets in line with inflation for the first time since the 1990’s. Assume the employee earned R20,000 per month and received a 6.0% salary increase. The actual increase in their after-tax net pay, because the tax brackets remained the same, only amounted to 5.2%.
- Medical aid costs are increasing in excess of inflation and have been for some time. These spiralling costs and the fact that the government did not increase the medical aid tax credit last year, further eroded an employee’s disposable income.
- The business travel deduction was not increased to take account of inflation.
Employees did therefore experience a significant decrease in net take home pay last year.
- Unionised environment. Labour research group Andrew Levy Employment Publications has recently stated that the average wage hike, as a result of collective bargaining, was recorded at 6.9% in the first half of 2019 – the lowest level in 12 years compared to an average wage hike last year, of 7.2%. Recent wage negotiations include, inter alia:
- NUM rejected Siyanda Bakgatla Platinum Mine’s offer of 5% increase for the 1st and 2nd year and 5.5% for the 3rd The union demanded 6%.
- Anglo American Platinum has offered 5.5%. NUM has demanded 12.5%
- Impala Platinum has offered a 5.0% increase for category C workers. AMCU has rejected this offer.
- In August 2019 BMW, Ford, Isuzu, Mercedes Benz, Nissan, Toyota and Volkswagen agreed that hourly associates would receive a 9.0% increase in the 1st year, and in the 2nd and 3rd years they will receive an increase in line with consumer inflation or 7.0%, whichever is the greater.
- Employers in the chemical and paper industry are insisting that the salary increase should be a real 1.0% to 1.5%. CEPPWAWU is demanding 9.7%
- In August 2019, SAMWU and the South African Local Government Association agreed to a 7.0% salary increase for municipal workers.
- In August 2019, NUM has tabled wage demands of between 6.0% and 12.5% at various mines
- In October 2019, the nine security sector unions have rejected the 5.0% wage increase offered by employers in October 2019.
While the scientific formula would suggest a salary increase of (4.7% = 1.0%) 5.7%. The fact that employees experienced a decline is take home pay in 2019 because of the Budget would probably result in one rounding this to 6.0%. However, as a result of low growth, adverse business conditions and affordability, your recommended salary increase for 2020 is:
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.