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Home » Industry News » Business Advisory & Financial Services » The impact of higher interest rates on salary increases and employee expectations

The impact of higher interest rates on salary increases and employee expectations

Authored by: Kirk Kruger, member of the South African Reward Association 

A bleak outlook for SA employees

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

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

How are salary increases determined?

Is it the responsibility of employers to award increases inline with, or even ahead of, inflation? Historically, companies in South Africa have awarded salary increases which are higher than inflation.

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

Key skills

In a competitive market, where key skills are hard to come by, a company may need to allocate additional budget to retain the skills which are critical to success. A business which employs a high proportion of knowledge workers may need a higher increase budget because the skill set they employ is receiving above average increases in the market.
Impact of union negotiations

One of the roles of a trade union is to negotiate competitive salary increases for their members. There are times when a company will need to exceed the budgeted salary increase because of potential industrial action which could lead to lost production and loss of income for employees.

Individual performance

In a pay for performance environment, one would expect high performers to receive a higher portion of an increased budget. There are times when a significant portion of the increase budget is not available for performance-related increases due to union settlements or a lack of managerial willpower to significantly differentiate increases. Additional budget may then be required to reward the high performers, and this will increase the overall cost.

Inflation

CPI is an indicator of the increase in the cost of living for the average employee. It is a good reference point of the level of increases needed for employees to maintain their standard of living. It is important to note that CPI is a backward-looking indicator whilst increases are awarded for the year ahead.

The impact of higher interest rates

Inflation has ticked up steadily in the last two years, mainly driven by COVID-19 related effects. These interest rate hikes have significantly impacted the cost of repaying loans. As an example, a person with a bond of R1.5m, 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.

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

The interest rate hikes will have left the average South African employee in a difficult position. Employees have two alternatives to deal with these challenges:

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

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

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