Those who manage reward in Australia and New Zealand find themselves caught in a pincer between a small budget to fund increases to the pay bill and a tight labour market for high-skill workers. To make the situation even more challenging, the economic outlook continues to be uncertain, growth in labour productivity remains low and inflation and interest rates are predicted to rise this year. What’s the impact that this will have on annual reward decisions?
Employees expect to be compensated, at a minimum, for price inflation so they can maintain the purchasing power of their wages. But it is clear from our research that budgets for pay increases in most employers in Australia in 2017 will see only a 2-3 per cent top-line growth. With a 1.4 per cent inflation rate, the real wage increase will be only 1.6 per cent at maximum. In New Zealand, a 2.5 per cent salary increase is forecasted, with 0.6 per cent inflation, for a 1.9 per cent real salary increase. Hence, what people are experiencing is that their pay rises are not giving them as much purchasing power as it once did.
This scenario puts organisations in a difficult position. Should they try to increase salaries so that real wages are upped or do they allow the inflation rates to get away from the salary increases?
The first approach is potentially good for morale. It can drive up employee engagement and motivation and the increased productivity that might come with this could offset some of the reward costs. But in most organisations today, budgets are tight and poor pay rises and wage gains are unavoidable. If the company does not approach this situation both strategically and tactically, employees may feel less valued in their roles and choose to leave.
The good news for organisations is that salary is not the only reason why employees stay with the company. In fact, recent research from Korn Ferry revealed that employee expectations are shifting and organisations must adapt to the priorities and requirements of the modern-day workforce if they are to secure and retain top talent. Our database of Employee Opinion Norms (2017) confirms that trend as shown in the table below:
So how do you build an effective reward program and reward packages that are aligned with the needs of your employees? Well, I should highlight that the first step is to step away from rewards and look at the bigger picture. Reward cannot be managed in isolation, it is part of a wider context. Your pay system must be aligned with the overarching message that you telling your people about what you are as an organisation. To achieve this, you need to consider three elements:
- Your business strategy What is the long-term purpose of your organisation, the business goals for the next years and how you will achieve those goals? Identify the levers you must pull to create value for your company. Think about how you can link rewards to the things that matter most to the business.
- Your people strategy Your people are your most valuable assets how are they going to achieve your business goals. What are the needs of the company in terms of talent moving forward? This is particularly important today because automation does bite and 40 per cent of the jobs that exist today will not exist in 10-15 years. Investigate and understand the potential impact automation, technical change and business direction on your organisation. How can you direct your people to developing the skills your company will need in the future through your reward system?
- Do you know what your employees want? Ensure you understand the attitudes and expectations of the people you want to keep. Consider diversity and the demographics of your employee population. Are you giving them what they need? Are you creating the right conditions for all members of the organisation to give their best each day? Are you collecting the necessary employee data and feedback?
Australian Treasurer, Scott Morrison, said that low wage growth is the nation’s biggest economic problem. Stagnant salaries also represent a huge challenge for organisations. But once you understand the strategic context together with business and employee needs, you will create reward policies and design reward packages that will attract and retain the right talent for your organisation.