The challenge of setting salary in 2022

Businesses are facing a tough recruitment market and amid talk of the “great resignation”, securing talent and setting competitive remuneration packages has never been more important. Chris Wright, Mattie Smith and Abby Chilcott discuss points to consider.

Time to read: 4 mins

As an employer, arriving at a competitive salary to retain and attract the right employees requires an analysis of a myriad internal and external factors. So, as you stare into your salary spreadsheet and gaze into the crystal ball that is 2022, how do you make sense of it all? 

Taking a facts-based approach and being “street smart”

Reliable data is fundamental to good decision-making on salaries. It helps us understand market trends and movements and evaluate the competitiveness of what is being offered. Commonly used data is the Consumer Price Index (CPI), a national measure of inflation, and the Labour Cost Index (LCI), which measures wage inflation across all sectors of the labour force. These statistics are easily obtainable from Stats NZ and the latest figures show that the LCI hit 2.6% to the end of the December 2021 quarter with the CPI making headlines by hitting a three decade high of 5.9% for the same period.

It also pays to look at predictions on how these indexes are set to move over the course of the year and what this would mean for your business.  ANZ bank has predicted that inflation will hit 7.4% in the second quarter of 2022, and with a rise in the minimum wage from 1 April 2022 there are suggestions of salaries continuing to rise.

As with everything, there are limitations to relying solely on these figures (we will explain this later), so it is critical to gather facts relative to your specific market or industry. Salary surveys can be a useful place to start, but they may be too generic, access can be costly, and with the market moving as quickly as it is, the surveys are often out of date by the time you look at them. Many are likening the current market to a “street war” and having your ear to the ground and harnessing the expertise and insights of recruitment agents and even potential candidates may give you a more realistic picture of what is really going on out there.

Other suggestions are to conduct an in-house comparison of existing and new hire salaries to identify discrepancies and map out trends, review your recruitment fees over the past 12 months and consider whether this money would be better spent on salaries to retain or attract top staff, or utilise salary comparison websites to see how your salaries stack up against your competitors in the public eye.

These ideas are not exhaustive and can be used alone or in conjunction with another. We suggest you select the data to best suit your business context and keep your finger on the pulse, as it may be necessary to review salaries more regularly than before to stay competitive in response to market changes. The annual review may be far too late. 

Limitations of the Consumer Price Index

The CPI is a useful measure of household inflation, but it is a very broad-brush approach and should be properly understood. It is calculated by measuring the inflation of a sample of goods and services that the general consumer or household would purchase and so it does not represent the spending habits of all your employees or the actual increase of their household expenditure. The bottom line is that the CPI is not a perfect metric and although it might seem logical to increase salaries in line with it, this is not necessarily the case. 

Employee considerations / taking a holistic approach

Your employees will be seeing the same headlines as you and making up their own mind on what they believe a competitive salary is. The figure will, of course, be important to them but in this current climate it is not the be all and end all. Businesses should therefore think holistically and consider additional factors such as job satisfaction, career progression opportunities, flexible working and bonus incentives as part of the package that employees are seeking, as some may prioritise these over a salary that pays above the market rate. Try to understand what motivates the individual and make it personal. 

Communicating salaries with employees

An often overlooked part of the salary review process is communicating the results with your employees. This has traditionally been done with the handing over of a letter and has the reputation of being a somewhat awkward process for all involved. It pays to think about how you go about it; you may want to speak to employees beforehand to explain your review process and set parameters or you may want to do it individually with a personal conversation. No matter what method you choose, the most important thing is to be transparent and make sure you can justify a decision that is consistent and fair across your organisation.

Lastly, don’t be afraid to be wrong. Managing employee expectations in a difficult market is not easy and you should take any feedback from staff seriously and respect the fact they have had the courage to raise the concern with you. You never know − it might shine a light on an aspect of your review that you had not considered.