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PAYROLL COMPLIANCE IN AFRICA : THE HIGH COST OF CUTTING CORNERS

Payroll Compliance in Africa: The High Cost of Cutting Corners

What does payroll compliance mean?

In the past, payroll compliance was focused primarily on the process and was audited, controlled and managed by the ubiquitous internal audit procedure. Those of us in the payroll space are all too familiar with a group of auditors descending on our office once a year to check:

Payroll audit files
Ask for audit trails and files to ensure all instructions in the payroll followed a predefined process.
Audit the access controls and adherence to these.
Audit segregation of duties.
And of course, asking idiotic non-related questions.

Seldom are the actual tax and social security calculations back tested; probably because the internal auditors do not have the training and/or knowledge to test such calculations.

In addition to the above, there is an emphasis on annual or regular IT audits. These are invaluable to ensure that the payroll platform used to both process and transfer data are aligned to the IT risk strategy of the business and comply with the relevant data processing laws in the country.

Once again, the current audit process focuses on process, access and platform security along with adherence to a predefined process. To mitigate the cost of regular audits, payroll platforms and even employers incur the cost of subscribing to ISO27001, ISEA3402 or SOC type audits to ensure the payroll is compliant.

The above ensures the platform’s compliance but does not ensure the accuracy of the statutory calculations, withholding and reporting requirements. In the African payroll environment, this is important given that local revenue authorities have no reluctance to levy exorbitant fines on employers. And international companies are prime targets for this treatment. Many employers tend to think that choosing a credible payroll platform implies accurate statutory calculations- think again!

We are not saying that the system providers perhaps do not align the platform with the legislative requirements. They do but a payroll platform facilitates compliance – it does not guarantee compliance.

The evolution of payroll systems has meant that most are now heavily customizable and/or highly configurable to ensure they can accommodate the diverse range of needs and salary structures one observes in Africa. Payroll systems therefore must be configured correctly and amended to comply with new regulations.

Internal audit reviews will interrogate the integrity and compliance of the system but in our experience, the greatest compliance risk is incorrect taxation or calculation errors which may lead to massive financial risk. In addition, fines being levied may get into the public domain which may lead to reputational risk for the company.

To address, and ultimately mitigate this risk, Axiomatic now offers a Payroll Health Check.

The Health Check will reverse calculate the payroll for the tax year of assessment in the country, taking cognisance of the tax and social security legislations and regulations. The objective is to determine if the configuration and operation of the payroll is compliant.

Axiomatic's Payroll Health Check ensures your payroll is compliant by reverse calculating the tax year's assessment with full adherence to tax and social security regulations. Click the image below to have a conversation with us.

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NIGERIA SALARY INCREASE FORECAST FOR 2025

Forecasting Salary Increases in Nigeria: A Scientific Approach to a Complex Challenge

“Sharon, please could you give Finance the forecast Nigerian salary increase percentage for 2025 and the projected increase in our salary cost”

We stated in our article dealing with the South African salary forecast for 2025 (Click here to view this article) that this request normally sparks a sense of foreboding as it is a clear indication that the annual salary increase process is imminent- with all the associated angst, issues, problems, heated negotiations and hard work that is required.

In Nigeria, this question would spark sheer terror and there is little doubt that Sharon would break out in a cold sweat!

Formulating salary increases in Africa can be a difficult undertaking for organisations but historic economic factors have rendered this an almost impossible task in Nigeria.

QUICK HISTORY LESSON

INFLATION

Inflation has remained high in Nigeria for several years because of structural issues, as well as external imbalances. A food crisis, heightened insecurity, a misaligned exchange rate and dollar illiquidity, and supply chain disruptions are some key domestic contributors.

Inflation has averaged:

PETROL PRICES

Nigerians have benefited from cheap petrol due to subsidies which were introduced in the 1970s. Nigerians regarded the subsidy as a direct benefit of the country’s oil wealth. The government estimated that the petrol subsidy cost them circa. US$ 10 bn per fiscal year. In President Bola Tinubu’s first address in late May 2023, he abolished the subsidy. The immediate effect was that the petrol price increased from NGN 254 in April 2023 to around NGN 535. The price then steadily increased to around NGN 800 until the state-owned oil company NNPC increased petrol prices to just under NGN 1,000 in early October 2024.

THE NAIRA

The much-beleaguered currency has depreciated significantly over the last year

Whilst the depreciation has resulted in more expensive imports (and concomitantly imported inflation), the significant lack of dollars in the market has made it impossible for international companies to repatriate profits or dividends. Little wonder that many international companies are scaling down operations or exiting Nigeria – Shoprite, Tiger Brands, Woolworths, Microsoft, Bayer AG, Unilever, Proctor & Gamble, Kimberley-Clark to name a few.

We have long advocated that clients adopt a scientific approach to the preliminary salary increase forecast and then use the unfolding economic data over the next few months to update the original forecast. Unfortunately, this is of little assistance in Nigeria but in the absence of an alternative methodology, let’s follow the process.

INFLATION

Our departure point in the forecast process is to determine the expected inflation rate for 2025. Salary increases are implicitly linked to inflation; where inflation is one of the most important determinants when deciding on the quantum of the salary increase. Employees want to retain the same purchasing power with their remuneration from one year to the next.

Consistent with the Axiomatic methodology, a “forward looking” approach must be adopted where inflation is forecasted for 2025, and the proposed salary increase is based on this result. We remain firm advocates of this methodology as it calculates the amount of the salary increase which will be “forfeited” to inflation. The alternative approach, namely the “backward looking” methodology, uses the previous year’s inflation rate which is “sunk” and thus does not exert an influence on the additional purchasing power given to the employee by granting him or her an increase.

Nigeria’s historic inflation rates and the Axiomatic forecast for the remainer of 2024 and 2025 are detailed in the table below:

REAL SALARY INCREASE

The quantum of real salary increases in Nigeria is impossible to benchmark, given that employers have adopted diverse ways to protect employees against the ravages of inflation. Some have granted interim increases while others have introduced an inflation or hardship allowance.

One can however safely conclude that employees have received negative real salary increases over the last few years.

FORECAST OF 2025 SALARY INCREASE

Normally we would take the projected inflation rate, add the historic real salary increase and with a significant degree of confidence, recommend a salary increase for 2025. This is not possible in Nigeria.

POSSIBLE OPTION

A feasible and equitable option may be to introduce an Inflation Allowance (“IA”).

1. A salary increase of 20.0% is granted.
2. An IA is instituted and clearly communicated to employees.

The trigger would be 25.0%.
If inflation in any given month is greater than 25.0%, the difference between 25.0% and the prevailing inflation rate would be paid to the employee as a monthly IA.
If inflation is below 25.0%, no IA is paid.
If our inflation forecast is correct, the IA would be paid in January, February and March 2025 but would then cease.

3. The advantages of an IA include inter alia, the following

The IA Policy will bolster, augment and improve the Employee Value Proposition (“EVP”). Employees will realise and appreciate that the employer understands the increasing and volatile cost of living pressure and is prepared to assist.
This decisive action will hopefully furnish the company with a tangible Return on Investment because it will reduce staff turnover, improve the EVP and mitigate the high cost of recruiting new employees.
Most importantly, the IA ensures that high fixed employment costs are not entrenched in perpetuity; rather only some temporary relief is afforded to employees.

As can be appreciated by the above discussion, formulating a cogent and equitable salary increase for Nigeria is difficult. The decision must also take cognisance of the financial health of the employer and a myriad other factors.

Over the coming months Axiomatic will continue to update our 2025 recommended salary increase in response to new data, include some quantitative considerations and discuss some emerging trends we are observing in the market.

Need help navigating the complexities of salary increases in Nigeria? Contact us to discuss your organization's specific needs and learn how we can support you in making informed decisions.

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KENYA 2025 SALARY INCREASE UPDATE

Kenya Salary Increase Forecast 2025: Aligning with MPC's Inflation Outlook

Our recent article, Kenya Salary Increase Forecast for 2025, explained the methodology we adopted to derive a 5.75% salary increase forecast for 2025 – Click Here to read this article.

The Kenyan Monetary Policy Committee (“MPC”) met on October 8, 2024, and it always insightful to examine this committee’s thoughts on inflation, to identify if their economic forecasts are different to ours. Our model is forecasting inflation to average 4.40% in 2025, significantly below 5.00%, which is the middle of the inflation target range.

At the meeting, the MPC stated:

“ Kenya’s overall inflation declined to 3.6 percent in September 2024 from 4.4 percent in August, thereby remaining well below the mid-point of the target range. … Non-food non-fuel (NFNF) inflation eased to 3.4 percent in September from 3.5 percent in August, reflecting the lagged effects of previous monetary policy tightening. Overall inflation is expected to remain below the mid-point of the target range in the near term, supported by lower food inflation owing to improved supply from the ongoing harvests, a stable exchange rate, and stable fuel prices.”

“The MPC noted that overall inflation has declined further and is expected to remain below the midpoint of the target range in the near term, supported by stable food inflation attributed to improved supply from the ongoing harvests, a stable exchange rate, and lower fuel inflation.”

As an aside, the Committee decided to lower the Central Bank Rate from 12.75% to 12.00% which should furnish cash strapped employees with some relief.

Given this incoming data, and the fact that the MPC Committee agrees with our forecast that inflation will remain below the midpoint of the inflation target, we remain comfortable with our previous salary increase recommendation:

While this salary increase will provide employees with a real salary increase of 1.39%, it does take cognisance of the increased social security deductions highlighted in our previous article and concomitantly ensure employees maintain their purchasing power.

We will continue to monitor future developments and provide regular updates.

Have questions or need more information about our Kenya salary increase forecast? Our team of experts is here to help. Get in touch with us today to discuss your organization's compensation and benefits strategy.

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AXIOMATIC POWER BI JOURNEY: TURNING DATA INTO DECISIONS

Unlocking Insights: How Power BI Revolutionized Our Payroll Reporting

WHAT IS POWER BI?

Power BI, a business analytics service by Microsoft, is a powerful tool that transforms complex data into easy-to-understand reports. It is a user-friendly interface and drag-and-drop functionality makes it accessible for users at any skill level, enabling the creation of stunning visualizations without extensive training.

From the Visualizations pane, you can choose how your report will be displayed—whether as a table, matrix, or pie chart. Power BI seamlessly integrates the selected data into your chosen visual format.

The Payroll Connector is a game-changer for integrating payroll systems (like PaySpace) with Power BI. This pre-built tool pulls payroll data directly from PaySpace into Power BI without any messy manual exports or complex data transformations. It covers all the key metrics: gross pay, deductions, taxes, benefits, and net pay—everything you need for reporting and analysis at your fingertips.

GETTING STARTED: FROM SIMPLE TO COMPLEX REPORTS

Figure 1: Your first look when opening Power BI.

Next, select how you want to display your data. Let’s say you start with a simple table that shows some biographical data.

Figure 2: Building a flat table report.

Feel like switching it up? With just a click, you can transform your table into a pie chart, a stack chart, or whatever fits your style!

MAKE IT PRETTY: UNLEASHING CREATIVITY

Power BI is more than just data. It’s your canvas! You can go wild with aesthetics, design awesome dashboards, and create professional-looking reports that dazzle.

If you’re feeling fancy, dive into DAX coding and craft dynamic measures to automate all those manual calculations you used to wrestle with. And Power BI supports almost any file format—Excel, CSV, PDF, JSON—you name it!

OUR POWER BI JOURNEY SO FAR

Since starting this journey in November 2023, Axiomatic has built some seriously cool reports for both our internal and external clients. One standout? A costing report that used to take hours of manual labour—administrators had to extract data from 4 separate reports just to meet the client’s needs! Now, with Power BI, we’ve cut it down to a single report that takes only about 15 minutes to generate. This represents a saving of over 40 hours per month, every month for our payroll team—and we’re just getting started!

One of our proudest accomplishments has been creating consolidated reports for multiple companies. Where payroll systems could only generate one report per company before, Power BI now lets us pull data for over 42 companies with the push of a button!

We’re also diving deep into the fun side of Power BI—exploring its visual tools, cool shortcuts, and everything in between. Our team is on a mission to find smarter, faster ways to eliminate the tedious work of generating monthly payroll reports.

Discover how our team can help you streamline your payroll reporting and unlock valuable insights. Get in touch with us today to learn more about our Power BI services.

Stay tuned for more exciting updates in our next issue. Until then, happy reporting!

The Axiomatic Team

If you found this article insightful, you won’t want to miss our previous piece on Automation in Payroll. It delves into practical examples of how automation can streamline payroll processes, reduce errors, and boost efficiency.

Check it out here: Automation in Payroll: A Practical Case Study Example.

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KENYAN SALARY INCREASE FORECAST FOR 2025

Kenya's 2025 Salary Outlook: Navigating Inflation, Economic Growth, and Employee Retention

“Sharon, please could you give Finance the forecast salary increase percentage for 2025 and the projected increase in our salary cost.”

As we stated in our article dealing with the South African salary forecast for 2025 (Click here to view this article) this request normally sparks a sense of foreboding as it is a clear indication that the annual salary increase process is imminent- with all the associated angst, issues, problems, heated negotiations and hard work that is required.

Formulating salary increases in Africa can be a difficult undertaking for organisations. A salient reason is that most international surveys do not cover many countries in Africa. Moreover, the surveys that do include African countries, often provide information of limited utility which is often out of date by the time it is published.

However, the forecast is not difficult, and we have long advocated that clients adopt a scientific approach to the preliminary salary increase forecast and then use the unfolding economic data over the next few months to update the original forecast. Finally, to incorporate other factors into the decision and then formulate an equitable final salary increase for 2025.

INFLATION

Consistent with the Axiomatic methodology, a “forward-looking” approach must be adopted where inflation is forecasted for 2025, and the proposed salary increase is based on this result. We remain firm advocates of this methodology as it calculates the amount of the salary increase which will be “forfeited” to inflation. The alternative approach, namely the “backwards looking” methodology, uses the previous year’s inflation rate which is “sunk” and thus does not exert an influence on the additional purchasing power given to the employee by granting him or her an increase.

Kenya’s historic inflation rates and the Axiomatic forecast for the remainder of 2024 and 2025 are detailed in the table below:

Normally we state that the risks to the forecast are to the upside- where the risk is greater that inflation could be higher than our forecast. This year, barring any exogenous shocks, we think the risk is possible to the downside because of the strengthening of the shilling (17% appreciation YTD) and lower fuel and food prices.

The Kenyan MPC Committee agrees with our inflation forecast and at the 6 August 2024 meeting stated that “Overall inflation is expected to remain below the midpoint of the target range in the near term, supported by a stable exchange rate, lower food prices with expected harvests, and stable fuel prices”. The mid-point of the range referred to is 5.0% (range of 2.5% to 7.5%).

REAL SALARY INCREASE

The next step in the scientific process is to establish the possible quantum of the “real increase”. A real increase is defined as the increase after inflation has been considered. As an example, if the salary increase is 6.0% and inflation is 4.0%, then a 2.0% real increase has been granted. The quantum of real salary increases in African countries is difficult to quantify and unlike developed markets, there is no “normal” real increase which is targeted. Our approach is that an equitable real increase for employers to target is 1.0%.

The graph below indicates the real salary increase granted to employees in Kenya over the last few years. Cognisance must be taken of the fact that 2022 and 2023 were outliers resulting from the COVID-19 pandemic and the implications of the supply chain shocks experienced in those years.

FORECAST OF 2025 SALARY INCREASE

The scientific and qualitative approach would conclude that an equitable salary increase would therefore be:

However, before we flippantly forward this salary increase to Finance, we must take cognisance of the fact that certain new social security deductions in Kenya this year have significant reduced employees net take home pay.

1. In February 2024, the National Social Security Fund (NSSF) employee contribution increased considerably:

2. The Affordable Housing Act established a framework for the collection of a housing levy and the implementation of the affordable housing program for low-income citizens. Each employee is now required to contribute 1.5% of their gross monthly salary.

3. The new Social Health Insurance Regulations (SHIFU) have been published and will probably be effective in October 2024. These regulations stipulate that a household will pay a monthly statutory deduction contribution to the SHIF at a rate of 2.75% of the gross salary or wage of the households

The current recommended forecast salary increase for Kenya in 2025 is 5.75%.

While this salary increase will provide employees with a real salary increase of 1.39%, it will take account of the increased social security deductions and ensure employees maintain their purchasing power.

The above forecast obviously ignores quantitative factors such as economic growth, union demands, trends in compensation and benefits and of course, the unique financial position of the company. These however should be considered closer to salary increase time.

These however should be considered closer to salary increase time. Over the coming months Axiomatic will continue to update our 2025 recommended salary increase in response to new data, include some quantitative considerations, the possible VAT reduction and discuss some emerging trends we are observing in the market.

Need help navigating the complexities of salary increases in Kenya? Our team of experts at Axiomatic can provide you with personalised guidance and support to ensure you make informed decisions about your 2025 salary increases.

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