“What salary increase should we incorporate into next year’s budget?” This question is a clear indication that the salary increase cycle has commenced and that it is time to dust off the crystal ball and forecast next year’s salary increase for employees.

Inflation in South Africa is notoriously difficult to predict for the salient reason that the currency exerts a significant influence on inflation. Salary increases are linked to inflation which concomitantly makes forecasting a salary increase, which is equitable to all stakeholders, extremely demanding.

Despite this complexity, there is a manner by which to formulate an informed and scientifically formulated forecast which can be employed in the budget process. The departure point is to forecast the future inflation rate. The table below enumerates the historic and the future inflation rates which Axiomatic Consultant’s model is currently forecasting.

Figure 1: Forecast Inflation Rates for Axiomatic Consultant’s

Figure 1: Forecast Inflation Rates for Axiomatic Consultant’s

Our forecast is aligned with the inflation forecast of the Monetary Policy Committee who are also expecting inflation to average 5.8% in 2017 and 5.5% in 2018. This is slightly lower than the Bureau for Economic Research which is anticipating 6.0% and 5.9% for 2017 and 2018, respectively.

Having determined the average expected inflation rate, there is one final process. One needs to establish the quantum of the real increase. A real increase constitutes the increase after inflation has been taken into account. 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 increase granted by South African companies over the last 14 years:

Figure 2: The table illustrates the real increase granted by South African companies

Figure 2: The table illustrates the real increase granted by South African companies

The normal methodology adopted by most remuneration practitioners is to add a 2.0% real increase when determining an equitable salary increase. The data presented above corroborates this “rule of thumb” given that over the last 14 years the average real increase granted by companies is 1.8%.

We would however highlight that we are observing a discernible trend of lower real increases. Perhaps the most significant indicator was the 2015 agreement between COSATU and the government in respect of public sector salary increases. The final agreement was a 7.0% increase; increasing at inflation plus 1% for the ensuing two years. This does, on the surface, appear to demonstrate that some semblance of understanding of business affordability is being considered in union negotiations and perhaps most importantly, a possible indication that in general, the market is willing and agreeable to move away from the “2% real increase rule of thumb”.

Global growth is anaemic and more importantly, the South African economy is in an uncertain state where growth will remain low. Our model is predicting growth in 2017 of 1.0%, improving slightly to 1.5% in 2018. Low growth, low levels of consumer spending and an environment where it will be difficult to pass on increasing input costs to consumers, indicate that the profitability of local companies will be under pressure. This obviously has a direct influence on the quantum of salary increases which local companies can grant to staff in 2017.

In light of the foregoing, we anticipate that real increases will be restricted to no more than 1.0% in 2017.

One can now forecast the projected salary increase for 2017. 5.8% {the average inflation rate} PLUS 1.0% {the real increase} = 6.8%. The forecast should therefore be that salary increases for 2017 will be between 6.5% and 7.0%.

This scientific and Logical approach

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To read this year’s forecast click here: /news/salary-increases-for-2018/