Do away with salary increases – How financially distressed companies can mitigate liquidity problems during the Coronavirus pandemic

Salary reviews

The phenomenon and practice of annual salary reviews by employers, contrary to some understanding, does not automatically mean that salaries must be increased every year irrespective of the general economic climate or the specific financial position of the businesses concerned.  There is normally a contractual obligation to review salary increases each year but there is no obligation to increase salaries.

Salary increases must be reviewed rationally with due regard to a variety of relevant factors and always in the context of the best interest of the business. That best interest, in turn, should be assessed in good faith and should not be based on arbitrary or irrelevant considerations. This would include short term profit for shareholders although there are liquidity issues or outlandish demands based on ‘mandates’ from workers bearing no relation to the performance of the business.

In many industries, employers engage in collective bargaining with Unions in respect of salary increases for employees falling within bargaining units. Many employers favour concluding multi-year wage agreements so as to avoid annual negotiations and potential industrial action. This includes the State which favours concluding multi-year agreements through the Public Service Bargaining Council.

For executives and staff, remuneration committees also play a critical role in determining appropriate salary increases and avoiding largesse. Factors such as appropriate job grading, market comparisons, historical performance, profitability and growth forecasts, anticipated expenditure and liquidity, corporate and personal performance and other relevant markers should be considered.

In South Africa, salary increases from year to year have frequently been higher than inflation and in some years have been substantially higher. At times, one has wondered if this can be sustained. In conjunction with this, many Unions have lodged demands for wages and other benefits which have both been extravagant and which, on occasion, bear no relevance to the market-related wage for labour or the financial position of the business. In order to avoid strikes and industrial unrest (including threats of violence) in some cases, employers have reluctantly accepted these demands.

One of the most significant examples of this is the recent salary agreement struck between SAA, NUMSA and SACCA. It was inconceivable that the parties agreed on a salary increase of about 6% for 2020 (which was backdated to April 2019) in circumstances where SAA was technically insolvent, dependent on the State for funds over a number of years and where SAA was then placed under business rescue as expected. NUMSA, SACCA and the executives of SAA must take full responsibility for this debacle. It reflected both a lack of comprehension and weakness.

Restructuring exercises in response to financial distress

As is the experience currently, high salary increases can quickly become unsustainable in times of severe financial difficulty and this often results in the need to restructure the business by reducing salaries and/or retrenching employees. Reducing salaries in these circumstances is unusual in the South African context and it may be preferable from a medium-term perspective to not grant salary increases for the year with a view to maintaining liquidity. Accordingly, distressed employers could take this step-in addition to suspending or not paying salaries during the lockdown period. This would also be an option in terms of section 189 of the Labour Relations Act in relation to avoiding future retrenchments if possible.

The financial impact of coronavirus pandemic

The financial impact of the Coronavirus pandemic is placing many businesses, both large and small, in financial distress. Many employers manage the issue of liquidity on a month to month basis and do not have sufficient resources during a period when there is no productivity to successfully manage their businesses. In anticipation of severe liquidity issues which will arise during the next months, many employers are taking steps to reduce expenses and one of the options is to consider whether salary increases should be granted at all this year.

In this regard, the Government has recently confirmed that it will not be granting salary increases in accordance with the multi-year wage agreement concluded with Unions in the Public Sector during 2018. This was perhaps inevitable in circumstances where:-

  • there will be reduced tax received from the private sector (employers and employees);
  • the aggregate of VAT will probably decline and this may be significant;
  • funds must be transferred to provide food to the poor;
  • small and other distressed employers must be financially supported;
  • State debt must be managed rationally and if possible reduced.

Salary increase in holiday

These considerations must be seen in the context that, by all accounts, many categories of State employees (“the new Bureaucratic Bourgeoisie”) are extremely well paid and therefore could take a salary increase holiday for a year. We do not include teachers, nurses, policemen and other similar civil servants who in our view are underpaid.

The funds released through such a salary increase holiday, assuming that they exist, could be transferred to the poor for food support and provide financial assistance for financially distressed small employers. This should not lead to disputes and strikes. That response will intensify the general financial stress after employees return to work when productivity will be needed.

In respect of employers in the private sector, many may wish to either revisit wage agreements or discuss salary freezes or temporary wage reductions. Accepting the cancellation of salary increases is a huge sacrifice for employees but they must see it in the context of current liquidity. Accepting that change would also exhibit solidarity with distressed employers and could possibly avoid harsher consequences such as closures and retrenchments.

National accord

With the above in mind, it is worth considering whether NEDLAC should attempt to negotiate a national accord permitting a salary increase holiday to be implemented for all financially distressed companies this year in order to enable businesses and the economy to recover. As indicated this option could assist in reducing retrenchments after the lockdown ends, a vital consideration, and ensuring that businesses are able to maintain liquidity.

This is a time for leadership both nationally and at company/Union level. They should engage with each other to secure agreements on this issue. As an act of good faith, managers in the private and public sectors should also dispense with salary increases this year and take salary decreases for a period in solidarity with their employers and in support of the nation as a whole.

Written by Rod Harper and James Horn
of Cowan-Harper-Madikizela Attorneys

Rod Harper of Cowan-Harper-Madikizela Attorneys
A picture of James Horn of Cowan-Harper-Madikizela Attorneys