Managing pay increases and pay conversations: Frequently asked questions

Sylvie Thrush Marsh, Chief Evangelist
By Sylvie Thrush Marsh, Chief Evangelist

Conversations with employees about pay and pay raises can be tricky, especially in tough economic conditions. We get a lot of questions from our members and employers about pay increases and handling salary discussions, so we’ve put together this page to answer them.

Send us any questions you have and we’ll keep updating this page with answers and best-practice advice.

Questions covered:

What is remuneration and how is it different to pay?

Remuneration refers to how you recognise, pay, and reward your people, and is a broad package that includes salary or wages, bonuses, and Kiwisaver contributions, as well as any other compensation, benefits, allowances, or incentives they receive for their work.

Pay is more simply what an employee is paid for their work, e.g. an annual salary, wages (usually payment by hourly rate), rate per piece, or commission.

How much should I be increasing my team’s pay?

We typically advise businesses to keep pay in line with market rates and to regularly review salaries so your rates stay in touch with that of your competitors.

There’s nothing stopping you from offering less than market rates - so long as you meet legal minimum entitlements - but you may have to accept unhappy employees or high turnover. You could also increase your pay to above-market rates if you really want to keep and attract talented staff, but it can be costly.

Find out more about remuneration strategies and reviewing pay.

Do I have to increase someone's pay if they aren't performing?

So long as you meet minimum wage rates or a higher rate set in the person’s employment agreement, you don’t legally have to increase anyone’s pay.

We always advise keeping pay and performance discussions separate, to improve objectivity and transparency. If your performance review system is effective it should be able to quickly identify when a person isn’t meeting their agreed objectives, so you can help rectify the situation before the pay conversation comes up.

Learn more about managing employee performance and development.

What should I say if someone asks for more money than I can afford to pay them?

These sorts of issues can be tricky to deal with, as you don’t want to damage a person’s motivation, especially if they are a highly-valued team member. However, if the business is not in a financial position to be able to increase salaries or wages, you only have so much wriggle room.

Building solid employment relationships based on trust and transparency should mean the situation isn’t such a surprise to your employees, and they should understand that it‘s not the right time for pay increases. Look at what else you can do for people by way of perks or benefits, and keep the conversation open, so that when things pick up, you can explore higher remuneration.

How do I communicate a pay raise to an employee?

Formalise the outcome of the pay review/discussions in writing so both parties are clear as to what the increase is, and when it will come into effect. This can be captured in a letter - there is no requirement to update the employee’s employment agreement.

Be sure to communicate any change in pay to your payroll team; there’s nothing worse than increases not being paid correctly once they’ve been agreed to!

If the minimum wage increases for my low-pay earners, should I increase everyone else’s wages?

There is no legal obligation to pay people more than the minimum wage or what is contained in their employment agreement. However, an increase in the minimum wage may be a good time to review remuneration across the company, to ensure your pay scales are fair, relative, and competitive.

Should I be combining/linking pay reviews and performance reviews?

Our recommendation is that these discussions shouldn’t be directly linked unless the performance review results relate directly to a pay rise or bonus payment, e.g. when the employee meets agreed sales targets.

Remuneration is determined by a number of factors - e.g. external and internal market relativity, pay equity, general job performance (the day-to-day), performance review results, length of service, legislation, overall company performance - so the employee’s performance will be one factor to consider when weighing up a pay increase.

However, if the performance review links directly to pay, it can turn the review process into a pay negotiation rather than an honest, meaningful discussion about current performance and future goals and development.

Get more practical performance review tips.

Can I make an increase in pay conditional upon the employee signing an updated employment agreement that I issued?

It depends on the circumstances. If, for example, the updated employment agreement includes an offer for a new position with the company and the pay increase is tied to the new role, then yes, but purely because the employee needs to agree to the amended terms and conditions of employment before taking on the new role. If the employee doesn’t agree to take on the new position, then their pay remains the same, as per their current role.

However, if you issued an updated agreement because it reflects changes to employment legislation and the employee’s pay increase is due to recognition for tenure within the company or the business hitting its targets, then the increase is irrespective of whether they sign the agreement or not, and should not be withheld if they do not agree to sign the new agreement. 

If an employee refuses to sign updated terms and conditions of employment, please contact the MyHR team for advice.

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