Money isn’t everything, right? You can read any number of articles on HR or people management explaining how employees prefer to be recognised by things other than money (we’ve written a few ourselves). It might be better benefits and perks, more time-off, or more flexible working hours.
But at the end of the day, for most people, earning money is a principal reason to go to work each day. It’s also one of the easiest ways for them to measure themselves and their achievements. So, what you pay people matters.
Remuneration (how you recognise, pay, and reward your people) can get left on the shelf as a low-priority item. This might be deliberate - say the business is in tight financial times and can’t afford to pay more in wages or salaries - or it may be due to people being too busy and finding the pay review process too laborious. However, there are consequences to getting remuneration wrong, not the least of which are potential legal issues. Then there’s the damage it can do to employee motivation, retention, and recruitment, and the company’s overall reputation.
So let’s have a good look at remuneration, its significance and common strategies for paying people effectively, and how to review remuneration and understand pay parity.
In a follow-up article, we’ll examine the best ways to approach pay conversations with your people, and what to do if they aren’t happy.
Why remuneration is important
Many businesses are in a competitive labour market, so if you pay less in wages or salaries compared to your competitors, it can be difficult to attract talented people and you risk losing the ones you have.
We consider paying people what they think is fair (and what the business can afford) a basic “hygiene factor”. These are things that need not to be terrible in order for people to be happy with their conditions and for you to be considered a decent employer. While paying people unfairly will have a big impact on their sense of value, their engagement, and commitment to the business, having the most sophisticated, absolutely fair remuneration strategy won't automatically add value for your people. It will just avoid the negative consequences of getting it wrong.
It’s a bit like brushing your teeth: not doing it is pretty gross, and though brushing them twice a day probably won’t win you any awards, it will help you avoid cavities and expensive dental bills.
So, employers need to view remuneration (pay rates and salary increases) as part of a wider strategy to keep employees motivated in their role and in helping the business achieve its goals.
It’s about offering a well-rounded package. So as well as rates of pay, what are the elements that make your business a great place to work (your employee value proposition)? It may be employees having a sense of purpose in their work or a belief in the company’s mission, additional leave or more flexibility, development and training opportunities, career growth, a sense of autonomy and creativity, or strong relationships within the workplace.
What motivates one person may not motivate another, so it’s best to have a range of strengths and benefits to offer people.
Learn more about recruitment and employee retention in a competitive market.
Why you need to get pay right
In New Zealand, there are a robust set of legal minimum entitlements that form the foundation of any employment agreement, and all employers need to understand them and factor them into employee remuneration packages.
Every employment agreement must have a clause that sets out how much a person is paid and how their pay is calculated. The amount an employee earns must always be at least the applicable minimum wage rate (hourly, daily, weekly, or fortnightly) and those earnings can’t be averaged out over a month or a season - the employee must earn at least the minimum wage for all hours worked during each pay period (i.e. from pay-day to pay-day). There are also minimum leave and public holiday entitlements.
Then there’s the Wages Protection Act, which ensures the integrity of wages and salaries paid to employees, so employers cannot make deductions from wages, except in a few cases like tax or Kiwisaver, without the employee’s consent.
How you pay employees is also quite defined. They can only be paid in cash or (if agreed in the employment agreement) bank transfer, not in something else, e.g. the business’ products or staff discounts.
Many employers have suffered financially over the past few years for failing to pay minimum legal entitlements to their employees. In 2020, Labour Inspectors found 136 employers in Auckland and Northland had failed to pay workers the minimum wage over the past 5 years and the businesses were penalised between $145,000 and $200,000 each.
Plenty of other large organisations have made mistakes with holiday pay, and leave and shift allowances, which have ended up costing millions to rectify. Having your name splashed across the headlines as a bad employer will also do nothing for staff morale or your reputation.
Find out about avoiding basic employment agreement mistakes.
Reviewing remuneration
There are a number of compelling reasons why employers should regularly review their employees’ remuneration.
Things are constantly changing, whether it’s minimum pay, employment legislation, or the broader market, so you need to ensure that your business is keeping up with changes in order to avoid legal strife or employees becoming unhappy or being poached.
People don’t like to stay stagnant or go backwards financially, especially with the cost of living increases we are currently seeing. Employees may also be looking for new opportunities or have new priorities after the past few years of disruption and uncertainty caused by COVID-19.
Remember, it’s usually a lot more costly to attract new employees rather than to hold onto the ones you have. By the time that you recruit, onboard, and get a new employee’s performance up to where the previous person’s was, you were probably better off paying the employee you already had a little more.
It’s also important to align remuneration with company performance, objectives, and culture in order to support the overall business strategy. Reviewing remuneration along with changing performance goals is key to ensuring that individual employee performance and incentives can be set in line with broader company goals.
All employees’ efforts should help the business achieve its goals and they should be rewarded accordingly.
Another key question is when should remuneration be reviewed. This can be tied into calendar or financial year business-planning. Often businesses align it with employee performance reviews, but we believe separating individual performance reviews and remuneration reviews is best, to ensure performance conversations focus on performance and pay discussions on pay.
You may also wish to review an employee’s remuneration at milestones throughout their tenure, such as after probation or a year’s service. Whichever way, it’s important to ensure that there’s transparency and that employees understand when and how their pay is reviewed.
What is pay parity?
Pay parity is a general concept of paying people fairly for performing the same job, regardless of employer, sector, the employee’s gender etc. Parity does include allowing for some differentials, like location, performance, and experience.
Pay parity is important for employers to keep in mind, because without it you run the risk of losing touch with what people could earn elsewhere or finding your employees are unhappy when they compare their remuneration to that of others inside or outside the business.
There are 3 main ways to approach pay parity:
1. Market parity
Marity parity means you pay your employees fairly compared to what other employers would pay for their skill set. This is usually what people mean when they talk about pay and remuneration parity.
Market parity can be tricky to assess because the pay rates for individuals employed by other businesses are confidential, however, some pay data is publicly available, e.g. national and international salary surveys.
Be aware that Fair Pay Agreements are coming (similar to Australia’s award system), which will set baselines for what employers can pay based on industry. This will provide more transparency around what people should be paid for performing their job.
2. Internal pay parity
Internal pay parity means people in different roles, teams, and levels of seniority are paid fairly when compared to each other. It‘s all about ensuring your pay scales make sense, e.g. is someone earning $100,000 adding twice as much value as someone on $50,000? Is it okay for there to be a $30,000 difference between your juniors and intermediates, but only a $5,000 difference between intermediates and seniors?
Another good question to ask yourself is would you be happy for your pay scales to be made public? This is a high-profile issue and there is a campaign to bring NZ in line with other countries in requiring companies to be more transparent with their pay gap reporting.
3. “Like for like” pay parity
“Like for like” parity means people in identical or similar roles are paid fairly and it can take experience and performance into account. It can’t, however, take things like gender, ethnicity, religion, parental status etc. into account, as they are prohibited under NZ employment legislation.
There is clear legal risk for your organisation if you pay people who perform work of equal or comparable value differently, as they could lodge a claim of legal discrimination, e.g. under the Equal Pay Act 1972 or Equal Pay Amendment Act 2020.
Different remuneration strategies
Now that we understand the legislative landscape, reasons for reviewing pay, and ways to achieve pay parity, let’s look at the different ways to approach remuneration. Wages and salaries are usually one of the biggest costs to a business, and for many smaller employers, trying to construct competitive, equitable and motivating pay packages can take up a lot of time and effort.
Here are the 3 main ways that businesses can approach their remuneration structures:
1. Pay low rates
So long as you meet legal minimum entitlements, there is no law that says you have to pay market rates. Paying below the market can be useful for small businesses or start-ups that may have limited cashflow.
Pros: Keeps your wage bill down, with less impact on cashflow.
Cons: You will need to accept high churn or employee unhappiness, and/or compensate in other ways, e.g. unique or challenging project work, outstanding company culture, or equity in the company (sometimes called “sweat equity”)?
2. Pay market rates
This is the most common approach, to pay what everyone else is paying.
Pros: Takes pay out of the equation when you’re competing for employees with other companies; Pay rates tend to be middle-of-the-road; doesn’t unnecessarily inflate your costs.
Cons: Vulnerable to employees being unhappy or leaving for reasons other than money; you will still need to distinguish your company for other reasons (as we discussed above).
3. Pay above-market rates
This is a strategy certain companies, e.g. Netflix, use to attract top talent.
Pros: People who care about money will come and work for you; easy to compete with other companies on pay alone because you’re paying more.
Cons: Expensive; may keep your employee turnover artificially low (i.e. people are reluctant to leave which limits healthy fresh blood coming into the company).
If you need more information or would like expert help in conducting remuneration reviews, please contact us.
