The human suffering in Ukraine is immense and leaves all of us aghast. Prosaic as it may sound by comparison, however, the economic effect of the Russia/Ukraine conflict is also trickling down into Belgium and the rest of the world, as prices for utilities and food are on the rise almost everywhere. Soon enough, Belgian employers will feel the impact of the increased cost of living in their own employment costs, as unusually almost all Belgian wage rates are in some form mechanically linked to the cost of living.
Indexation of wages is determined at industry-level and the methods differ depending on the sector: in the Chemicals sector for example, wages are increased not at a fixed time, but each time the consumer price index increases by 2%, which will next be the case later this month, for example. Joint Committee nr. 200 – one of the committees representing the most employees in Belgium (more than 480,000 in total) – has a different mechanism: salaries are only increased with effect from January each year to reflect the evolution of the adjusted health index over the previous year (health index being the consumer price index, minus certain unhealthy products, such as alcoholic beverages). Payroll agency SD Worx forecasts that the employees in JC 200 can count on an 8.38% pay increase in January ’23, and that on top of the already quite steep 3.58% increase at the start of this year.
Might this whopping increase still be avoided? Not very likely. In theory, the social partners in the different Joint Committees may still change the rules to soften the impact of the automatic indexation, but it is not very plausible that the unions will agree to such a measure. Similarly, the government could also impose a so-called “index jump” which temporarily overrules the sectoral indexation mechanisms, as it has done most recently in 2015, in an endeavour to prevent an unstoppable upward spiral of costs feeding off itself. Employers’ organisations have already requested a repeat, at least for the higher-end wages, but so far politicians’ reaction has been lukewarm at best.
So if these pay rises cannot be prevented, what is the message of this blog? It is that while these increases may be inevitable, the impact that they will have on your costs of employment may still be mitigated to some extent.
First off, in the near future, when you consider rewarding or attracting talent, it is advised to focus on solutions which will not be affected by the automatic index increase. The indexation applies to the employees’ regular monthly salary, including any increases in salary you award in the course of this year. Regular bonuses and one-off discretionary payments in the course of this year, such as sign-on bonuses and incentive awards, will not be caught by it, but may nonetheless go a long way to keep your employees happy. Also do consider again (if your unions will permit it) the size of the automatic pay ratchets in your company’s merit increase process, to avoid having to pay more than the company’s margins allow.
Second, in choosing compensation methods, this year is also the time to consider the options that give the “best bang for your buck” in terms of attracting talent and staff retention. Employees see the rise in their supermarket and electricity bills and those who are not feeling it yet are still worried because they read about it in the newspapers every day. They will be looking in most cases for the highest net possible. However, while regular salary increases and bonuses are nice, of course they are, there are other potentially more interesting options available in terms of employer cost vs. net result ratio:
- Are your employees still wholly or partly working from home after the pandemic? If so, are they already receiving a cost allowance to compensate for the cost of electricity, water and cookies they consume while working from their kitchen table? More details on the cost allowance can be found in our Working from Home series.
- Instead of awarding a regular bonus, you may consider introducing a collective results-based bonus as per Collective Labour Agreement nr. 90. The bonus is subject to social security contributions, but up to an amount of €3.094 per head per year it is tax exempt. This bonus may also in part replace the company bonus plan for the achievement of company or group targets. Individual targets may not be compensated through the collective results-based bonus so this is not the way forward for bonuses which are based purely on individual achievement.
- Do your staff members have young children? For those so blessed/burdened, a company allowance on top of the state child allowance may be very welcome. Please do contact us first to discuss, as the Social Security Service is very strict in the conditions it imposes for the allowance to be exempt from social security contribution. These allowances would also fall outside the indexation mechanism.
- There are still quite some other benefits to consider which are easier to digest in terms of social security contributions and employment tax and which fall outside the indexation mechanism: meal vouchers, eco vouchers, and why not, the discounted purchase of an e-bike? These benefits have an immediate impact on the employee’s net spending power and the added cost for the employer is significantly lower than the equivalent in regular salary or a bonus. If employees are more comfortable about their immediate financial situation, a group insurance pension plan also remains an attractive way to compensate employees and provide the reassurance that they may see out their days somewhere warm on the Costa Del Something.
The next few months may prove to be tumultuous for employers everywhere, but the measures above may prove useful also for the years to come. If any political measures are taken to soften the impact of automatic indexation in Belgium, we will of course also inform you through this blog.