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The economy has experienced significant changes since July 2018. The introduction of the Transitional Stabilisation Program by the Minister of Finance and Economic Development followed by the monetary policy by the Reserve Bank has brought in new challenges for businesses. The subsequent business challenges emanating from the policy changes above have brought in new challenges related to how people are remunerated.
The remuneration systems in Zimbabwe have been anchored on guaranteed remuneration packages from lower-level employees to senior executives. Over 90% to 100% of all remuneration in Zimbabwe is guaranteed (be it basic salary, cash allowances, and annual bonuses). Very few organisations operate ""true performance-based"" pay systems.
Over 70% of the employees fall under the National Employment Councils (NEC) collective bargaining framework. This means their remuneration is negotiated at the NEC level and once agreed, the employer has to comply or apply for an exemption. Very few NECs approve exemption applications. The employer needs to prove financial incapacity by providing documented financial evidence. None of the NECs in Zimbabwe includes performance-related pay in their collective bargaining frameworks. It is all fixed and guaranteed.
The remuneration structures above present a huge risk to businesses as the structure puts them in a high leverage situation. The remuneration leverage looks at the ratio of the fixed and guaranteed remuneration component versus the variable pay component. 90% to 100% of all remuneration in Zimbabwe is guaranteed with a small portion coming from variable pay. 30 to 80 cents of every dollar of revenue generated goes towards remuneration although there are variations by industry. This means Zimbabwean companies are not able to lower their remuneration costs in line with fluctuations in business performance. This is a huge risk for any business unless the money is donor-funded.
Less than 40% of the local companies have migrated to total costs to the employer. Those that have migrated to Total Cost to Company have cited the need for an equitable and more predictable staff costs structure. What is worrying though is that half of the 40 %( those who migrated to the total cost to the company) only partially migrated to the total cost to the company. Those that have fully migrated to total cost to the company keep referring to individual items found in the traditional model. This means they have not migrated to Total Cost but converted certain benefits to cash and called that total cost to the company. Total Cost to Company is a change of the whole remuneration mindset. It should be anchored on making the employee understand that all remuneration paid to the employee constitute staff costs from the perspective of the employer. Therefore the employer is better off paying them one figure which they can use according to their discretion. When making salary adjustments, the adjustments must be based on a total figure of the total cost, not certain individual elements in the original conversion calculations.
The traditional model, with a litany of benefits, makes it extremely difficult to predict with certainty and factor staff costs into the overall business costs. Under this model, you can never predict your staff costs in advance thereby bringing an element of risk in the administration of staff costs. Over and above the risk highlighted above, there is generally abuse of remuneration elements by the senior executives in the traditional model.
Whether a company goes total cost to the company or remains on the traditional model, that decision must be based on what strategy would give your business a competitive advantage.
The cost of living in Zimbabwe has significantly increased compared to last year. Inflation is on an upward trend. The monetary policy brought another dimension; open forex trading on the interbank market. This led to a serious devaluation of the local currency {RTGS dollars}. This means that employee remuneration has been eroded by a factor of 5.5 which is the average exchange rate now although the black market is much higher. It is safe to say at this stage most employees are struggling to make ends meet given the devaluation of their salaries and rising inflation. Put differently anyone who depends on a fixed income is worse off than they were this period last year.
Only 37% of organisations that participated in our survey are paying their employees in forex and most of them are from Non-Government Organisations (27%) and Mining Sector (20%). The general trend emerging is that organisation that exports their products or receive international donor funds/ grants are paying their employees either partly or fully in forex.
Companies need to earn foreign currency for them to be able to pay salaries in forex. The call by some trade unions and employee representatives for employers to pay in forex will simply be impossible to meet if the employers do not earn foreign currency.
We advise that if an employer wishes to pay salaries in forex but realises that they cannot commit to regular monthly payment; paying discretionary once-off forex payments would be more feasible. However, before making any such payment, the employer must communicate to employees that it is a discretionary once-only payment – to manage expectations.
The economy is increasingly re-dollarising on its own. We are anticipating that this trend will increase as businesses seek to safeguard themselves against the erosion of value through inflation and exchange drove losses. If this trend continues as we are anticipating, we are also likely to see more employers starting to pay either in hard currency or the RTGS equivalent. What is not yet clear is if employers will maintain the face value of previously denominated USD salaries or they will make changes.
Some employers still provide employer-assisted school fees for employee's children. School fees for children have significantly increased, with the majority of schools requiring a portion of the fees is paid in foreign currency. The above developments have left most employees who are on employer-assisted child school fees programs exposed thereby reducing the purchasing power of their salaries.
The cost of purchasing and servicing vehicles has significantly increased. This trend affects companies that are on fully expensed company vehicle schemes and also those that had converted to the total cost. We have noticed adjustments on average ranging from 30% to 60%. This is meant to cushion employees against the high cost of servicing the vehicle and fuel costs. Those companies that are offering a fuel allowance were also forced to adjust this allowance for employees given the huge jump in fuel costs.
Medical aid related costs have gone up significantly. Some medical aid societies have gone to the extent of pricing their services in United States dollars. This has put significant pressure on employers, especially how to fund the USD component when they do not generate US dollars. Even in RTGS dollars, the cost has significantly gone up.
The most sustainable way to remunerate employees is to tie a portion of the remuneration to productivity. Paying people based on productivity is the surest way to sustain higher wages. There is a need to reverse the current trend where over 90% of the remuneration is fixed and guaranteed across all levels. This will be extremely difficult to change for NEC level employees as the current bargaining model is extremely rigid. This should, however, be easy for none NEC employees where management has more freedom to structure the remuneration so that it's sustainable.
The biggest hurdle in trying to restructure remuneration for managerial employees is that senior executives tend to put their interests first before those of the business leading to unsustainable wages bills and numerous remuneration related scandals.
Most businesses reported an upward growth in both revenue and profit for 2018. The trend seems to be continuing. A worrying concern though is that most of the growth is price-driven other than volume-driven. While this is good in the short term, it is risky to pursue such a strategy in the long term. Most companies are surviving under a price umbrella that is difficult to maintain going forward. It is very likely that most companies relying on the price umbrella will experience reduced demand on their products and services thereby affecting cash flow and eventually profitability. It is a delicate balancing act for every business i.e. need to maintain demand and need to recover costs through price.
If businesses fail to maintain this balance the likely consequence is that they will have to retrench to reduce staff costs.
We are noticing “euphoria” around salary adjustments. We are noticing that several organisations are rushing to adjust salaries upward without being sure how their businesses will perform in the medium to long term. We project that most businesses will find themselves in a fix as they will not be able to reduce salaries when business performance goes southwards given the structure of remuneration models in Zimbabwe.
There is a need for extreme caution. Those organisations that have rushed to adjust salaries without sufficient understanding of how they are going to fund the adjustment in the current business environment may be forced to cut staff to remain viable. Consumers are constrained in terms of their spending and naturally, that will affect business. With low demand as a result of low consumer liquidity, most businesses will struggle to remain viable. Zimbabwean companies to a large extent have now realised that increasing fixed remuneration like basic salaries and allowances is a risky affair. The majority of companies are on the brink of collapse as a result of poor judgment when it comes to managing remuneration. Others have adjusted salaries haphazardly resulting in unsustainable wage bills. Others have not necessarily increased salaries but have increased headcount resulting in the same net effect; a wage bill that is not sustainable.
Despite the significance of optimal staff costs in running a successful business most the organisations have no coherent strategy to harness the value from what they pay in staff costs.
Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant - Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone 481946-48/481950/2900276/2900966 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com
This article was written by one of the consultants at IPC
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