• Axiomatic Consultants Rewards Insights

Projected South Africa Salary Increases 2021

We have stated in previous articles that the skill set required by HR personnel is constantly expanding. They are required to be a strategy swami, a finance guru, an operations rock star, an incentive ninja and a general behavioural psychologist Jedi. Now, if they are to accurately predict an equitable salary increase for 2021- they will have to become a soothsayer.

The email alongside normally strikes terror into any HR management team; however, this year with Covid 19, providing a cogent salary increase forecast is a daunting task.

Our previous salary increase forecasts have always reiterated the same advice – don’t panic and put on your soothsayer cloak – it is possible to provide Mike with a percentage, derived in a scientific manner, which represents a salary increase forecast that is both logical 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 year, the difficulty is exacerbated because of the Covid 19 pandemic.

Despite this additional 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 rate (in black) and Axiomatic’s forecast of future inflation (in red):

Our inflation forecast of 4.3% for 2021 is aligned with the Monetary Policy Committee who stated at their latest meeting that they expect inflation to average 4.3% in 2021. Further, although economists are predicting a wide range of inflation outcomes for 2021, our 4.3% prediction is close to the median of such forecasts.

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 considered. 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 18 years.

The historic methodology adopted in South Africa, when determining an equitable salary increase in the past, was to add a 2.0% real increase to the forecasted inflation figure. However, 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 to 1.3% and the 15 year moving average of 1.1%. This trend can be attributed to lower GDP growth, declining consumer spending, political uncertainty and the resulting lower level of business confidence.

Given this assertion, the calculation of the “scientific” salary increase formula is easy: