MPs got a pay rise this month, did you?

Recent news of a staggered 10 percent salary increase for New Zealand politicians has raised eyebrows, particularly in light of a reported cost of living crisis affecting households and ongoing public service cuts resulting in job losses.

From an objective perspective, the Remuneration Authority – the independent body established to set the pay for key public office holders – followed a best practice approach to review salaries for elected officials that resulted in the recommendation for pay increases.

Let’s look at a breakdown of how to set compensation structures in a way that is fair and transparent, while also ensuring organisations remain competitive in today’s rapidly changing job market.

Remuneration refers to the financial (base salary or wages, incentives, commissions, overtime, bonuses, stock options, signing bonus etc) and non-financial (flexible working, paid leave, life/health insurance, in-office catering and other “perks”) rewards, that together form an employee’s overall compensation for performing a role.

Generally, we speak in terms of ‘salary’ or ‘package’ in reference to compensation.

More broadly, HR departments are increasingly adopting a Total Rewards Strategy approach. This is a more holistic view that combines traditional and non-traditional offerings to determine the monetary, beneficial (wellbeing, recognition etc), and developmental rewards for employees, relative to achievement. To find out more about Total Rewards Strategy, read our blog How rewarding is your reward strategy?

Remuneration is a measure of how we are rewarding our people, in a way that builds an engaged and satisfied workforce.

There are some fairly obvious drivers for setting (and reviewing) compensation as a tool for attracting and retaining top talent, while also reducing employee turnover. Ultimately, compensation matters – it’s a tool to help:

Attract talent – in a competitive job market, how you compensate your people can be an attractive selling point for prospective employees. Beyond salary, non-financial benefits are becoming increasingly important and are effective mechanisms for attracting a more diverse candidate base.

Engage employees – there’s a direct correlation between employee satisfaction and overall organisational performance. How people are remunerated, and importantly, how they are recognised and rewarded is a big part of what makes employees happy and motivated to perform.

Retain talent – the foundation of any successful business is its ability to keep productive and talented workers, thereby reducing turnover. There is a lot that goes in to creating a workplace culture that retains talent and that includes remuneration.

Most organisations have in place a Remuneration Strategy and/or Remuneration Policy that outlines the method used to compensate employees. Your approach may include banding or pay structures, which sets out how salary levels for individual roles are set. This is typically a formal document, adopted across the entire company, that acts as a guide for both individual employees and business leaders/hiring managers.

Having a structured approach not only demonstrates fairness and equity, but it also means that you are setting pay that’s aligned to your overall business objectives and wider organisational strategy.

When it comes to determining remuneration for an individual role, there are a number of factors to take into account. These typically focus on:

Role requirements – job type, accountabilities, decision making authority, reporting line etc.
Organisation-specific – it’s size, composition (including ownership structure) and business activities.
Industry-specific – specific sector and industry reach.

To remain competitive and be seen as an employer of choice, there are also person-based elements that should be considered when determining the remuneration package for a role. These may include:

• Overall breadth and depth of experience required of an individual.
• Relevant in-demand skills or specific experience required for the role.
• Previous performance/outputs in a role, directly relevant to achievement in the current role.

You’re essentially aiming to determine a person’s value to an organisation – similar to a Job Evaluation. This may however be variable. In talent scarce job markets for example, companies often need to offer more attractive overall remuneration packages to secure the best candidates for a role.

FAQ: What is Job Evaluation?

Job evaluation is a step-by-step process for establishing the relative size of a job, or how much a position should earn, by determining the value the position brings to an organisation. The focus is on the role rather than on the actual employee, and it is based on the responsibilities a position holds and the corresponding skills and experience a candidate needs to perform in the role. Job evaluations are commonly used when establishing a new role.

As part of a robust recruitment process when you are looking to fill a role vacancy, your external recruitment partner will be able to assist with a role analysis and role/position review to help determine the appropriate level of remuneration for a role – including salary requirements, performance related pay and other non-cash benefits.

A trusted search and recruitment consultancy has specialist knowledge and real-world insights into sizing roles, that will help you achieve the right outcome when it comes to securing talent for a role.

This includes Salary Benchmarking, which is incredibly important when setting remuneration for a role. This information can be obtained from a number of sources including reputable salary surveys. Essentially you are trying to answer what would an employer be required to pay if they were recruiting this role right now.

If you are keeping a keen eye on market forces – including what’s happening in your sector and more broadly in the labour market and economy in general – then it absolutely makes sense to be reviewing remuneration on an annual basis (at the very least). This approach also fits with annual budgeting and setting of organisational strategy.

However, the labour market is changing constantly. There will also be change within your organisation, like promotions, hitting milestones etc so it’s likely that you are having remuneration related conversations with employees on a more regular basis, particularly your high-performers with in-demand skills. The key is being prepared and not acting too late. Ideally, you want to be having these conversations and acting on decisions before you start experiencing a spike in employee turnover.

While it is a separate and distinct HR/people function, Performance Management – the formal assessment or appraisal of work performance – helps to inform remuneration decisions. Employee feedback on performance and developmental needs has proven value for both an organisation and an individual. For full effect, appraisals should be completed on a regular cycle. Bear in mind that there is often an expectation that a remuneration review will follow a performance conversation.

Reviewing remuneration (and performance) does not necessarily mean an increase in wages. The only real exception is if you are earning minimum wage, which is set against a national standard.

Financial pressures impact businesses as well as individuals. If offering pay rises across the board is not feasible for your organisation, there are other “creative” options based on non-financial benefits that you could consider. For example: working from home, additional paid leave, and other wellbeing benefits. A good starting point is to ask your people, what’s important to them right now.

In some instances, implementing a pay freeze or initiating restructuring may be a reality for companies that are struggling to cope with rising costs and tighter profit margins.

While an effective tool, it is important to remember that any ‘non-salary’ related boost in benefits (in isolation) is not a sustainable long-term solution. Private sector wages grew by 6.6 percent in the year to December 2023, above inflation which rose 4.7 percent over that time. If you skip a year of salary increases, not only do you risk not remaining competitive in the labour market, but you will eventually have to make a correction at a much higher rate.

Of note, the announcement of the current pay rise for MPs is the first since 2017 with the Remuneration Authority stating that the new pay rate aligns with other roles with comparable levels of responsibility in the New Zealand market.

In today’s rapidly changing job market, savvy businesses are rethinking their remuneration structures to be more competitive. And that means creating a whole of business strategy that is simple to implement while also being transparent for new and existing employees alike – offering a clear, equitable total remuneration package that goes beyond salary.

How you remunerate your people is often considered the foundation of the employer-employee relationship. It should be an integral part of your business and people strategy.

Decipher Group are industry experts in the recruitment of executive, management level professionals, and governance leaders for New Zealand and Australian businesses. We’ve been connecting talented people to exciting opportunities for 16 years.

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A short Q&A with our team on related questions that people commonly search for on Google.

There’s a common misconception that employees leave jobs due to money. Compensation is important and may be a motivator for employees to pursue new opportunities, but it’s generally not the real reason for their departure. Research from online job site SEEK into why people leave roles shows that work conditions/the environment (53%) and management/leadership in the business (31%) rate higher than salary and compensation (30%).

According to the Ministry for Women, pay transparency refers to a “range of actions to make pay information more visible inside and outside an organisation”. This may include for example, communicating pay policies (how pay is determined) through to full disclosure around salary or salary ranges for all roles. Not only does pay transparency build trust with employees, but it is also a key driver in addressing gender pay gaps and pay equity.

Schedule a meeting with your supervisor to discuss your performance and contributions to the company. Highlight specific achievements and responsibilities that demonstrate your value, and request a salary review, citing market rates and your contributions as reasons for the increase.

For tips on how to confidently discuss your salary expectations, read our blog Advice for answering, what are your salary expectations?