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Spotlight on Africa: Setting salary budgets amid economic challenges

Compensation Strategy & Design
Beyond Data

By Douglas Leenen | March 17, 2022

Despite post-pandemic recovery, market conditions and the economy remain unstable in Africa, triggering tense conversations between employers and employees.

After watching COVID-19 slowly derail two years’ worth of growth, in 2021 organizations across Africa yearned for the pre-pandemic days when conditions were more stable. However, despite post-pandemic recovery in the region, market conditions and the economy remain unstable, triggering tense conversations between employers and employees.

In July 2021, actual salary budgets in Africa (5.9%) were closely aligned with 2022 projections (6.1%). However, fluctuating economic conditions in the second half of 2021 resulted in organizations increasing overall average salary increase budget projections to 6.6%. (See Figure 1.)

Chart showing the 2022 overall average salary increases, excluding zeros: July 2021 vs. December 2021 projections
Figure 1. 2022 overall average salary increases, excluding zeros: July 2021 vs. December 2021 projections

While this change reflects a cautious and remarkable rise in salary increases, it does not keep pace with rising inflation and many employees are still saying, “Not enough.”

But does it have to be?

Post-pandemic recovery in 2021

Last year started on a promising note. Many businesses across the continent were slowly but steadily recovering from the financial nightmare wrought from the pandemic. Many organizations expressed a prudent yet optimistic outlook through their salary budget strategies.

In fact, 76% of organizations in Africa increased salaries in 2021, according to WTW’s Salary Budget Planning Survey, reflecting a substantial increase from 46% in 2020. Average actual salary increases also rose to 6.1% in 2021, up from 5.6% in 2020. And while these numbers did not indicate full financial recovery, they did show an acknowledgement of employee resilience through the pandemic and a slow return to normalcy and budgetary stability.

2022 salary budgets in the wake of post-pandemic pressures

This year, 94% of organizations in Africa will increase salaries, according to the results of the December 2021 Salary Budget Survey. An average overall salary increase of 6.6% supports the general idea of post-pandemic recovery and higher financial confidence. (Figure 2.)

Chart showing the percentage of African companies increasing salaries
Figure 2. Percentage of African companies increasing salaries

Yet, as challenging global market conditions continue to emerge, organizations remain cautious with their salary budget decisions. (Figure 3.)

Chart showing the average overall salary increases in Africa, excluding zeros
Figure 3. Average overall salary increases in Africa, excluding zeros

A tightening labor market and sharp, unexpected increases in consumer price inflation (CPI) unfolded in the second half of 2021 and continue rising in 2022. Now, facing mounting pressure, organizations are wondering what to do next. With the onset of the Great Resignation, employees are demanding more benefits, more flexible work environments and, of course, higher pay – clearly expressing their discontent regarding salary increases and their failure to keep pace with inflation.

Is inflation a basis for setting salary budget strategies?

It would be remiss to discuss salary budgets without addressing inflation. It is important to remember that inflation is the decline of consumers’ purchasing power in response to an increase in the price of goods and services over time. When inflation goes up, employees often expect salaries to do the same.

However, it’s nearly impossible to raise salaries to match inflation when forecasted rates across Africa are hitting as high as 20.5% (Zambia) and 19.8% (Angola). Suddenly, a 0.5% year-over-year salary budget increase seems inconsequential.

Even for those countries in which 2022 salary increase projections surpassed the annual average inflation forecasts, the real salary increase outlook (salary increase after deducting inflation) remains conservative, with only Senegal surpassing 1%. (Figure 4.)

Chart showing the 2022 forecasted inflation vs. projected salary increases, December 2021
Figure 4. 2022 forecasted inflation vs. projected salary increases, December 2021

It also is important to remember that inflation is not a static indicator on which to base salary increase budgets – when inflation lowers, do wages decrease? No. As such, just because inflation jumps, wages should not necessarily follow.

Rather, most organizations follow a rewards philosophy that focuses on attracting and retaining new talent – especially in a highly competitive labor market. This approach puts the focus on the organization’s cost of labor, not the cost of living for employees. And using inflation to determine salary budgets is a direct deviation from the rewards philosophy.

How organizations in Africa are approaching salary budget planning

With labor shortages and CPI pressures, employers are not wondering if they should act, but when and how they should act. In countries with the highest inflation rates, WTW’s high inflation supplement suggest that 46% of employers in Africa have either acted, plan to act or are considering options regarding inflation.

Apart from increasing wages, organizations indicated that providing more frequent salary increases (40%) and paying an extra one-off allowance/lump sum (31%) are the most common actions they are taking. The remaining organizations do not have plans to take immediate action.

Additionally, some mid-sized organizations as well as companies in industries that were harder hit during the pandemic (e.g., travel, retail, leisure) have not recovered enough financially to be able to craft more cash-driven strategies. These organizations must lean on other attraction and retention tools such as more or better remote work options, adjustments to paid time off, increased flexibility and so on.

Recommendations for moving forward

  1. Set clear pay strategies and remember your rewards philosophy
  2. Setting salary budgets amid challenging market conditions is never easy. A one-size-fits-all approach won’t work, as every organization has its own unique financial goals and priorities linked to factors such as geography and industry. Thus, it becomes crucial to have a clear strategy and ask relevant questions such as:

    • What are we trying to accomplish with salary increases?
    • How do we achieve those goals?
    • To what extent do we want to differentiate for performance?

    By asking the right questions first, you will establish a more structured approach for answering them.

  3. Consider external talent market conditions
  4. Retaining and engaging key talent has become especially challenging in the Great Resignation. As an employer, it is important to consider how to address this challenge. To effectively compete in a tight labor market, it is important to get an accurate read on how both peers and competitors are approaching pay and benefits policies. This requires more than a gut approach, calling for reward professionals to rely on sound and accurate benchmark data to make informed and defensible decisions.

  5. Consider your organization’s unique situation, then be creative
  6. Every organization faces different challenges, whether internal or external. The pandemic divided the market, and everyone cannot fight the ensuing pressures with the same tools. Consider your company’s budget ceiling. To what extent can you rely on cash strategies to accommodate your employees’ expectations? Shift your Total Rewards perspective and stop pressuring base pay.

    Employees today are working in a variety of environments; therefore, they have different priorities. This could mean wanting shorter or more flexible workdays or it could mean wanting learning and development opportunities. Consider these types of opportunities – in addition to your pay philosophy – as you think about how you will attract and retain talent.

  7. Be transparent
  8. Many employees are unable to make sense of what goes on “behind closed doors.” Without clear, timely and transparent communication, the workplace can quickly become a breeding ground of misunderstandings and frustration.

    Be transparent about your salary review process. Ensure employees understand the organization’s pay philosophy and the factors that affect pay decisions. Amid ongoing uncertainty, employees need to feel respected – and that includes feeling like leadership is being honest and direct, even if it means bad news.

Employers must modernize their rewards strategies to accommodate employee expectations, but not at the expense of long-term vision. Bowing to public pressure and making impulsive pay decisions won’t serve anyone in the long run. Balance salary budget setting with other factors, including economic conditions and the organization’s financial strategy and goals.


Lead Associate, Work & Rewards

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