Bad news about South African salaries

South African employees are under a lot of financial pressure amidst the country’s high interest rates, and it is unlikely that they will receive salary increases well ahead of inflation in the short term.

This is according to South African Reward Association member Kirk Kruger.

Kruger said South Africans are among the most indebted people in the world, with as much as 73% of disposable household income servicing debt repayments. 

“We find ourselves in an environment of rising interest rates, high levels of unemployment, and escalating food and energy prices,” he said.

“Many people are facing extraordinary financial headwinds and struggling to service their debt on home loans, vehicle loans, credit cards and overdrafts.”

He said many people are also utilising informal credit arrangements with high interest rates.

“All of this paints a bleak picture for the average person, even if they are fortunate enough to have formal employment.” 

“In desperate times, employees may look to their employers to award salary increases well ahead of inflation to help them make up the monthly shortfall which occurs when debt repayments start to dominate monthly spending.”

While historically, companies in South Africa have awarded salary increases which are higher than inflation, this is not always the case.

Between 2005 to 2022, there were only two years – 2008 and 2022 – that salaries did not increase at a higher rate than inflation.

Both years were impacted by extraordinary global events. 2008 saw the global financial crisis, which caused inflation to surge ahead of salary increases.

In 2022, South Africa experienced the effects of Covid-19-induced supply chain disruptions and pent-up consumer demand, pushing inflation ahead of average salary increases.

Kruger explained that most companies use a combination of factors to determine annual increases, not just CPI. These are the factors most often considered:

• Market salary movements
• Market position of employees
• Key skills
• Impact of union negotiations
• Company affordability
• Company performance
• Individual performance

He explained that CPI is an indicator of the increase in the cost of living for the average employee and a good reference point for the level of increases needed for employees to maintain their standard of living. 

However, he said it is important to note that CPI is a backwards-looking indicator whilst increases are awarded for the year ahead. 

“Companies are, therefore, making future-focused decisions based on historical information,” he said.

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has attempted to get South Africa’s inflation within its target band of 3% to 6% since November 2021, when the current interest rate hiking cycle started.

While it has been successful in achieving this, as inflation dropped to 4.7% in July, their efforts have pushed the repo rate to a 14-year high of 8.25%.

“These interest rate hikes have significantly impacted the cost of repaying loans, and this has been felt by the average South African consumer,” Kruger said.

He used the example of a South African salary earner to illustrate this impact.

A person with a bond of R1.5 million, a car loan of R300,000, and a personal loan of R50,000 is now paying approximately R5,438 more per month on loan repayments compared to November 2021, he said.

This means this person will need to earn R8,915 more per month at a gross level to have the extra R5,438 after tax. That is more than a R106,000 per year.

He said the interest rate hikes have left the average South African employee in a difficult position. 

Kruger said employees have two alternatives to deal with these challenges – cut expenses so that more disposable income is available to service debt or try to increase their income.

“Moving jobs for higher pay is one way of achieving this, but not everyone is able to get a new, higher paying role,” he said. 

“Many employees will, therefore, hope that their annual salary increase will be well above inflation. Unions will also be looking for double-digit increases to give their members some relief.”

However, companies have many factors to consider when deciding on annual salary increases, and many companies have also experienced pressure in the country’s high inflation and high interest rate environment.

“Interest rates have risen dramatically in the past two years, but it is unlikely in the short term that annual increases are going to be far ahead of inflation,” Kruger said. 

“Just like their employees, companies have also experienced headwinds in the last three years.”

“The economic impact of COVID-19, load shedding, societal unrest, and rising input costs have left many organisations as buffeted as their employees.” 

“Ultimately, company affordability and overall company prospects will be the biggest drivers of salary increase budgets in the foreseeable future.”