Knowing the basics about salary increases

Ninety-five percent of employers are planning to increase salaries in their next review.

The promise of a salary gain “reflects the intensity of the skills shortage in today’s jobs market”, said Matthew Dickinson, CEO of Hays Asia Pacific, which did the survey.

Also factors? The rise in professionals planning to ask for a raise; the impact of pay transparency; and businesses stretching the salary increase budget to support employees.

‘It’s never a good time’

But how do employers come to determine the best salary to provide workers in the first place? And why is it important to offer a pay rise?

“It’s never a good time for a pay rise” — that’s an unspoken principle for employers according to John Shields, professor of human resources management and organisational studies at The University of Sydney’s Business School.

But for many businesses, they have little choice but to pay higher salaries — particularly when there is a talent shortage, he said.  

“If they want the talent, they actually have to pay,” Shields said. “And often if talent is scarce, they need to pay – to use the semi-technical phrase – ‘above the market.’ So what that means is above the market median usually, as determined by salary benchmarking.

Setting pay through benchmarking, enterprise agreements

A worker’s salary is generally determined by salary benchmarking.

“In general terms, for-profit organisations use market salary-level benchmarking usually with data that they contribute to as individual participants… that's gathered by remuneration consulting firms like Aon and various others,” Shields said. “And the aggregated data is then processed and fed back to individual participant companies in terms of: salary ranges for particular job descriptions; salary composition details in terms of what is fixed remuneration or base pay remuneration; what is variable pay; what level of financial benefits are involved.

“So the data that companies tend to use is quite sophisticated and detailed and generated from what we call salary surveys or compensation surveys, generally speaking.”

But Australia has also got a foundational level of minimum pay that is set by enterprise agreements, and awards, Shields said. This sets the base salary particularly for operational roles.  

“It's certainly open to companies to pay above that, if that is what they decide to do,” he said. “And one of the reasons they might decide to pay above the minimum is as a way of attracting talent – people with the sets of skills that the organisation actually wants that might be in short supply.”

Another factor that shapes an employee’s salary is the “post-hiring salary negotiations that are configured according to ongoing shortage of talent but also performance levels of individual current hires,” Shields said.

Timing of salary increases: Financial years and performance management cycles

Determining a salary is a complicated process, Shields said.

“There’s no lockstep, contextual system that determines when a company might adjust its pay level – they can be adjusted in an ongoing way,” he said.

Generally, an employee’s salary isn’t changed in the new financial year. Instead, the groups of employees whose salary packages are put together according to financial year tend to be C-suite executives who are part of an organisation's top management team.

“Typically in listed companies, their pay packages are geared to company financial results for the previous financial year,” Shields said. “And there are performance hurdles that are specified as well for that.”

While the financial year isn’t strictly the time when businesses look to increase salaries, employers might instead have an annual salary review cycle geared to the performance management cycle.

“[It’s about] looking at paying variable pay levels to employees who perform at different levels,” he said. “And that that cycle will vary from organisation to organisation — there's no fixed way to do it. It's sometimes quarterly, sometimes annual, sometimes six-monthly.”

The other contingent factor is what the current enterprise agreement cycle is. Typically, these are three years, Shields said.

Productivity and variable pay

Another importance consideration for salary increases? Productivity, according to Shields.

“Australian productivity has been very sluggish,” he said. “So, if you are to have a situation of pay increase – in terms of minimising the inflationary effect of increasing pay – you've also got to have an increase in labour productivity. So that the goods and services flowing into the economy are commensurate with the increase in pay lifts.”

Businesses can also change the way they configure their pay practices to attract and retain employees.

“You don’t necessarily have to increase fixed remuneration, like base pay,” he said. “You could actually make greater use of performance-related pay that's variable, not fixed pay. But you've got to be very careful, if you do that, that you've got valid and reliable ways of measuring performance and attributing that performance to individual employees or to teams of employees.”