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Salary Increases For 2018“John, what salary increase should we incorporate into the 2018 budget?” This question strikes terror into any HR management team and is a clear indication that the salary increase cycle has commenced in earnest. What’s more, forecasting is needed which is often tantamount to gazing into a crystal ball.

Despite Lao Tzu’s assertion that those who have knowledge don’t predict, unfortunately to forecast next year’s salary increase, some predicting is necessary – however, this should be done in a scientific and defensible manner.

Cognisance must be taken of the fact that 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 inexorably linked to inflation which makes forecasting a salary increase (that is equitable to all stakeholders), extremely demanding.

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 computes the historic inflation rates as well as depicts the future inflation rates which Axiomatic Consultants’ model is currently forecasting:

Salary Increases For 2018

This forecast is closely aligned with the inflation forecast of the Monetary Policy Committee (“MPC”) who are expecting inflation to average 5.3% in 2017 and 5.0% in 2018. This is however lower than the Bureau for Economic Research which is anticipating 5.8% for 2018. Our and the MPC’s lower forecast, is based on slightly lower interest rates, that the Rand will remain relatively strong during the period and that the 5-year inflation rate (indicated by inflation-linked bonds) is currently 5.2%.

Having now determined the average expected inflation rate for 2018 at 4.9%, 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:

Salary Increases For 2018

The general methodology adopted by most remuneration practitioners has been to add a 2.0% real increase when determining an equitable salary increase. The data presented above supports this “rule of thumb” method given that over the last 15 years the average real increase granted by companies is 1.8%. Now 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 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. In addition, IMATU, the Independent Municipal and Allied Trade Union, has subsequently agreed that for the period February 2016 to January 2017, salaries will increase by inflation plus 1%.

This does, on the surface, appear to demonstrate that there is an understanding of business affordability being considered in union negotiations. Further evidence that unions recognise the need for wage moderation is a Fedusa communication released in May 2017 that stated, “Employment is projected to decline until the middle of 2019, due to the downgrade and uncertain and difficult economic environment for job creation”. Business affordability issues are concomitantly indicating that in general, the market is willing and agreeable to move away from the old “2% real increase rule of thumb”.

Global economic 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 0.6%, improving slightly to 1.0% 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 reinforces the assertion that salary increases will be closer to a real increase of 1% rather that the traditional 2.0%.

Having contemplated the previous statements, one can now forecast the projected salary increase for 2018:

4.9% {the average 2018 inflation rate} PLUS 1.0% {the real increase} = 5.9%.

Using our initial example, “What salary increase should we incorporate into the 2018 budget?”. John’s forecast should be that salary increases for 2018 will range between 6.0% and 6.5%.

 

Salary Increases For 2018It is obviously too early in the salary increase planning cycle to definitively decide on a salary increase for 2018. Further, we have demonstrated that South African inflation is difficult to predict. Given this, we will continue to update the inflation forecast over the coming months. To ensure that you stay well-informed, please email us at info@axiomatic.co.za and we will send you regular updates.

 

To read last year’s forecast click here: https://www.axiomatic.co.za/news/salary-increases-for-2017/