How to decide who gets a pay rise

In the recent Hays Salary Guide FY24/25 some 86 per cent of NZ employers were expecting to give salary increases this year. That’s down from a high of 95 per cent last year, but still very robust. Not everyone will get the increase they are expecting though. For example, while 12 per cent of employees are expecting a pay rise over 10 per cent, only 4 per cent of New Zealand employers are looking to give that.

Ideally, the annual salary increase budget for all employers would sufficiently reflect the contribution, success and value of each employee over the past year. However, in the real world, there are often constraints on finances and sometimes leaders find themselves with a salary increase budget that does not stretch as far as they would like.

Deciding who will receive a pay rise, and the value of each individual increase, requires fair evaluation using set factors that you apply equally to each employee for a fair and transparent outcome.

8 key factors in determining salary increases

Consider each employee’s individual performance

A good place to start when evaluating and determining pay rises is to examine each employee’s individual performance. Have their successes added value and made a difference to your organisation?

To assist in your evaluation, refer to an employee’s most recent performance review. You can use this data to identify if an employee has exceeded performance goals and targets in the past year. Consider both the quality and quantity of work completed and measure performance against set goals for clear and transparent evaluation.

An employee, for example, might have mentored another employee, introduced new systems to the organisation or put their hand up for additional responsibilities. Or perhaps they delivered an important project ahead of deadline or above and beyond your expectations.

Also consider their attitude to work and performance. Do they have a positive impact on other employees? Have they introduced new corporate knowledge into the organisation that colleagues have benefited from? Do they collaborate effectively with others? Do they show initiative?

Consider too the employees’ development over the past year. Have they shown a willingness to learn new skills or take on additional responsibilities? Have they improved in any areas since their last review? Such factors can indicate an employee’s potential to grow with the organisation and contribute to its long-term success.

Weigh up your employees’ responsibilities

An employee’s job responsibilities vary depending on their role, but are usually defined in their job description. Revisit each employee’s job description to clarify their responsibilities and the complexity and scope of their role.

Then take an inventory of any additional responsibilities your employees have that aren’t captured in these documents. You may find that certain employees have assumed more responsibility over the past year than their job description suggests.

Scope creep, after all, is common in jobs. So, if an employee has assumed greater responsibility, you should factor this into your pay rise decision. You should also formally revise their job description – if their responsibilities justify a formal promotion, make it happen.

While promotions typically come with a pay rise, if your organisation isn’t in a financial position to offer a salary increase in line with their wider responsibilities, assure your employee that you will prioritise a greater salary increase as soon as you can.

Understand typical market rates for each employee’s role

Competitor’s typical salaries should also factor into your pay rise decisions. Employees want to know they are being paid a fair rate for their skills and expertise, so make sure your salaries align with those offered across your sector or industry.

Our annual Hays Salary Guide FY24/25 is based on a survey of more than 15,000 organisations and skilled professionals. You can download a copy to access typical salaries and insights relevant to your industry to ensure you are offering competitive salaries. If your salaries are below the external typical value, it can impact employee engagement and turnover.

By knowing that the salaries your employees are receiving are competitive with the external market, you can make a strong argument in support of the salaries you set.

Not every employer will set salaries that match the averages, of course. The size of your organisation and the region you operate in can play a part. That’s why our salary guide also includes, for each role, a minimum and maximum salary, along with salaries in multiple locations.

By knowing these salary standards, you can make more confident decisions about the value of each salary increase.

Evaluate your employees’ skills

The expertise and skills an employee holds can also factor into your decision – particularly if certain skills are universal requirements across your workforce. An employee who possesses specialised skills or experience may command a higher salary than the average for their role.

To set salary increases that reflect your employees’ skills, first set clear definitions of the job skills you intend to compensate employees for.

Some skills are easier to define in quantifiable terms than others. However, for a soft skill like teamwork, for example, define clear criteria you can measure against.

Consider the seniority of an employee’s role

Employees’ salaries often increase with seniority for various reasons. Senior employees typically offer a high level of specialty knowledge, commercial acumen, experience and leadership capability.

However, none of these attributes are inherent characteristics of seniority. So, when reviewing the salary of a senior employee, evaluate whether their seniority is indicative of breadth of experience, commercial acumen, specialist knowledge, leadership credentials, strong relationships and networks, industry insight and other essential qualities.

Likewise, some mid-level staff may be especially deserving of salary increases. Don’t underestimate their capabilities in areas senior staff are normally recognised for.

Remember, seniority can inform the hierarchy of salaries, but it shouldn’t automatically mean salary increase entitlement, particularly if an employee’s results and value aren’t amounting to those ordinarily associated with seniority.

Length of service

High turnover is costly, when a staff member leaves, organisations incur various recruitment costs, including job ads, and time lost doing interviews, onboarding and training. In addition, new hires often need time to get to the same performance level as the employees they replace.

Employees who provide organisations with long service can add a lot of value through loyalty.

So, ensuring your salaries are structured to encourage long service can be a big financial benefit for your organisation. It’s also an essential part of retaining top talent.

Skills gaps in your industry or sector

When determining the value of salary increases, consider the difficulty of attracting a new team member if this employee should resign.

While 20 per cent of employers in Australia feel the skills shortage has lessened, many roles are still in short supply. If your employee has skills that are hard to replace easily, take this into consideration when deciding on their salary increase.

According to our Hays Salary Guide a pay rise is the number one benefit employees are looking for at 71 per cent, and the cost of living is the number one reason they may look elsewhere at 64 per cent. If an employee with skills in demand leaves because they perceive their salary is too low, and it takes months to find then train a replacement to perform at optimal productivity, losing their skills may prove substantially costlier than retaining them for a higher salary.

When budgets are tight, minimising salary increases is an easy cost saving measure. However, it’s important to keep in mind that the money you invest into salary increases can drive savings and profits in other areas of your organisation.

Consider non-financial rewards

Ultimately, your salary increase budget can only stretch so far. Yes, ensuring your salary offering is competitive is essential, however employees who are happy and productive aren’t just motivated by money.

Today, a competitive salary is just one element in the overall compensation package. Also important is the non-financial element, consisting of benefits, flexible work environments, work-life balance, upskilling, wellbeing support, purpose and strong relationships between a manager and team.

As benefits expand in our post-pandemic world, these elements can make or break the success of your compensation. If you feel your employees deserve more than you can offer financially, consider adding additional benefits to their overall package to bridge the gap. Engage directly with employees to understand what would retain them.

More flexibility, work-life balance, career progression, training, mental health and wellness initiatives and additional annual leave are just some of the non-financial benefits you can use to reward high performance.

Communicating early is key to success

If the performance of your organisation has not been as expected this past year, flag this early with your employees. Let them know as soon as you can that the downturn in business might have implications on salary increases. After all, they have their own cost of living considerations, so communicate the news as quickly and clearly as you can.

Don’t wait until a salary discussion to share the implications of poor performance. Instead, make your rationale as transparent as it can be to help temper expectations and minimise disappointment.