Why firms are withholding salary increase

In the last two years, Kenya’s economy was beset by myriad misfortunes - high inflation that hit 9.6 per cent in October 2022, a devalued shilling that averaged Sh160 to the US dollar and increased taxes due to the Finance Act 2023.

The default reaction for businesses became layoffs and slowing down production to sail through this period. Then came 2024, and the economy came to a standstill as Gen Z-led protests dominated the end of the 2023-2024 financial year.

Manufacturers put the daily losses due to the protests at Sh2.8 billion, which was also the case in 2023 when the opposition-led protests took hostage the country’s economy.

The Sh2.8 billion a day is equivalent to the manufacturing sector’s daily contribution to the country’s gross domestic product. Annually, this is 7.2 per cent of Kenya’s Sh15 trillion GDP.

Then on May 1, 2024, President Ruto announced a six per cent increment in the minimum wage, which is not sitting well with businesses under the ambit of the Federation of Kenya Employers (FKE).

As such, the pertinent question has been, are businesses justified in withholding the salary increments as announced?

When asked why this increase is a challenge, Kenya Association of Manufacturers (KAM) Chief Executive Tobias Alando insisted that businesses are very much willing to enhance employees' pay.

“Most are open to increasing wages; particularly when such adjustments are aligned with ="https://www.standardmedia.co.ke/business/article/2001510503/businesses-defy-tough-times-to-record-improved-sales-in-2024">improved productivity<, output growth, and overall business performance,” he says. “However, achieving this balance is not always easy.”

He cites the current economic environment, listing rising cost of operations, constrained consumer demand and global market uncertainties as the reasons behind the sluggish implementation of collective bargaining agreements (CBAs) and minimum wage pronouncements.

“Every year, the government raises minimum wages in many manufacturing sectors during Labour Day. This significantly affects manufacturers, particularly in labour-intensive sectors like the textiles sector (EPZ),” adds Mr Alando.

He says KAM has expressed concerns on this tradition, which is a matter also alluded to by FKE. “Although intended to help workers cope with the high cost of living, it often leads to reduced job growth and increased production,” says the KAM boss.

“This is particularly challenging to small and medium-sized enterprises operating on narrow margins.”

KAM data shows 7,369 jobs were lost in the Economic Processing Zones (EPZs) in 2023. The situation is not expected to get any better owing to the 10 per cent tariff that President Donald Trump has imposed on Kenyan imports to the United States.

Taxes such as the enhanced National Social Security Fund (NSSF) that require employers to match employees’ contributions and the 1.5 per cent Affordable Housing Levy that also compels businesses to contribute are some of the levies that have made the cost of labour to go up.

Additionally, in the Finance Bill 2025, the government seeks to have employers adjust their systems such that employees get the benefit of reliefs immediately rather than claim from the taxman who has always struggled with refunds.

While this reduces the workload for the Kenya Revenue Authority (KRA), it is an additional administrative cost to employers. “Frequent changes in wage policies, particularly when introduced with short implementation windows, can make financial planning difficult,” says Alando.

Justifying the 2024 salary increment is also a challenge, looking at how some firms performed, especially those in the manufacturing and agricultural sectors, the country's two leading employers. For example, Kakuzi Plc, a major player in the agricultural space, took a hit as the strengthening of the shilling worked against its business model of exporting.

While the board recommended a Sh8 dividend per share, the firm made a Sh130 million loss in 2024.

“The Kenya shilling also strengthened by 15 per cent against the Euro, which averaged Sh140 during the avocado export season, resulting in lower revenues compared to the previous year when the Euro averaged Sh162,” explained Kakuzi Plc Managing Director Chris Flowers.

Bamburi Cement, a major player in the construction sector, made a loss of Sh877 million in the six months to June 30, 2024 compared to Sh88 million profit in the same period in 2023.

Limuru Tea Plc reported a loss before tax of Sh10.6 million for the year ended December 31, 2024, compared to a profit before tax of Sh10.4 million in 2023. This is despite an increased turnover of Sh144.0 million in 2024 from Sh137.8 million in 2023.

Even with such losses being recorded by firms operating in sectors said to have the most multiplier effect in job creation, FKE’s position has always been that salary increments should be done according to the law.

FKE Executive Director and Chief Executive Jacqueline Mugo, in a retaliatory statement to comments made by the Central Organisation of Trade Unions (Cotu) Secretary General Francis Atwoli on employers’ refusal to implement the six per cent wage increase, said businesses were advised to ="https://www.standardmedia.co.ke/business/business/article/2001513881/high-cost-of-living-threatens-kenyans-retirement-security-report">implement the directive from November< 1, 2024.

She said FKE has been on the frontline to propose other changes, such as reducing the affordable housing levy to 0.5 per cent from 1.5 per cent and revising tax relief bands to Sh36,000 from the current Sh24,000 to offer reprieve to employees. “These steps, if adopted, would ease the cost of living, increase the disposable income of the lowest-paid employees and make Kenyan businesses competitive,” said Ms Mugo.

She said a stable, predictable, simple and business-friendly taxation policy is what employers and businesses need as it will create sufficient employment and pay higher wages.

“Employers and the business community ask for clarity in the country’s economic direction. The policy should be clear whether Kenya is positioning itself as a producing or trading country. We desire a producing country, exporting goods across Africa and the world,” she said.

Mr Alando pointed out that while businesses are being accused of not implementing the CBAs, such agreements require time, resources and the ability to forecast long-term obligations. This is a challenge considering Kenya's ever-changing tax regime courtesy of the annual Finance Bills and Acts.

“In an unpredictable economy, it can be difficult to commit to multi-year agreements without the risk of future financial strain. Ensuring that negotiations remain collaborative and grounded in economic realism is key but not always easy,” he adds.

There is also the issue of inconsistent interpretation and enforcement of labour laws by the relevant officers.

“Even when companies comply with CBAs and pay the minimum wage of slightly above, they may still face allegations and cases of underpayment or non-compliance. Such inconsistencies often lead to a sense of harassment of the employers by the regulatory authorities,” he says.