REMUNERATION : Just Deserts – Rewarding experiences

Behind all the headlines marvelling at executive pay and bonuses lurks the less electrifying market remuneration practice for middle management and general staff. However, there’s more going on here than many people may think.
Sheffield’s 2006 Salary Review Survey and its Benefits Survey, published earlier this year, reveal conflicting pressures and tensions that place the average Kiwi employer in virtually no-win position.
Base salaries remain open to strong upward market pressure. Since New Zealand businesses make relatively little use of variable or at-risk pay programmes which might absorb some market adjustments, the primary pay lever available to most employers is base salary. That is, often the only option for increasing an employee’s cash earnings is to raise his or her base salary – which also means raising that employer’s fixed costs. Consequently, much of the market action around pay necessarily centres on the base salary component.
Since 1994, annual base salary boosts for white collar staff in New Zealand have consistently remained in narrow 3-3.5 percent range. That abruptly changed in 2005, when – exceeding forecasts – the median base salary increase for staff (except senior executives) hit four percent.
Sheffield’s annual Senior Executive Survey indicates that senior managers received median 5.5 percent base salary increase in 2005, also well ahead of projections. Compare these figures with 2005’s 3.2 percent increase in the Consumer Price Index (CPI).
Within the Sheffield Salary Survey, the 2006 projected median base salary increase for 2006 is four percent for senior management and 3.5 percent for middle management (average increases of four percent and 3.8 percent respectively). These levels are far above 2005’s 3.5 percent and three percent projections.
Unlike prior years, almost 15 percent of organisations in the survey are predicting increases of five percent for both senior and middle managers. In the past, organisations rarely indicated levels at or above four percent. As result, Sheffield anticipates actual increases will again outstrip forecasts.
Record low unemployment and ongoing skill shortages are, of course, exerting great upwards pressure. Employers often have to pay premium to attract the right candidate, and feel pressured to raise salaries smartly to retain precious existing staff. Above-market pay increases have become defensive strategy.
This year, the CPI recently hit four percent – well above the Reserve Bank’s one-to-three percent target range. Unlike 2004/2005 when the major contributors to CPI rises were construction and housing related – which the typical employee may be unlikely to experience personally – we now are experiencing double-digit rises in high profile items purchased frequently – such as petrol (as much as 33 percent above year earlier), local rates and food. Sticker shock has become weekly event as consumers brace themselves to brave the trip to the petrol station or grocery store.
A four percent CPI level is also significant because Sheffield’s data shows that almost quarter of New Zealand businesses base their annual salary budget on combination of CPI movements and individual performance, and another 15 percent rely entirely on CPI to set annual salary budgets.
Meanwhile, employers may be experiencing tougher markets, given slower national growth, high currency levels and margin pressures. In the past, when there has been more work to be done, New Zealand employers have been able to simply add more staff – and thus gain more staff hours. New Zealand businesses have also asked – or expected – existing New Zealand employees to work longer hours.
Today, with record low unemployment, New Zealand has simply run out of “more people”. Furthermore, according to reports by David Skilling, chief executive officer of the New Zealand Institute, employed Kiwis are working the longest hours in the OECD top 20 countries (with the exception of Iceland where they clearly have nothing better to do). These statistics have been widely presented throughout New Zealand in recent months.
Skilling has concluded that where New Zealand has fallen short is in labour productivity per hour. Recent NZ Institute data demonstrates New Zealand has the lowest labour output per hour among these same 20 OECD countries.
As result, New Zealand employers cannot justify or afford higher salaries without first investing in productivity measures to make that labour more productive. So, in the near term, staff expectations will exceed employers’ ability to pay.
The benefits picture is under pressure as well. Over the past 10 years, Sheffield has seen steady cashing up of benefits. In 1996 for example, 68 percent of organisations offered superannuation schemes. Today, 47 percent do.
According to the 2006 Sheffield Bene-fits Survey, in 2005, 72 percent of organisations provided motor vehicles to employees and 58 percent provided medical insurance. In 2006 the incidence of motor vehicles dropped to 62 percent and medical insurance also declined, showing 50 percent incidence.
The only benefit with steady growth has been telecommunications benefits such as mobile phones and laptops which are offered by over 95 percent of businesses.
Although motor vehicles and vehicle allowances have trended down steadily, as employers cash up the benefit and eliminate the administrative costs and hassles, in 2005, we noted an uptick in the incidence of vehicles (leased or purchased) for senior managers, rising from 73 percent to 80 percent of surveyed organisations. In our view, vehicles are high value, high emotion, high status benefit which is very tough to eliminate when retention of key executives is so critical. Providing vehicle may be an effective strategy for retaining valued manager.
There are two big benefit issues on the horizon in 2007. First, the Holidays Act moves minimum annual leave from three to four weeks on 1 April 2007. Will employers now offering four weeks move to five for key staff? For executives only? At this stage, many businesses have adopted wait-and-see attitude to this high cost issue. Nobody is anxious to lead the market; but nobody wants to be the last. Recent newspaper articles note that Telecom has flatly ruled out fifth week citing cost issues, whereas L’Oréal is adopting it as stated retention strategy. We expect this issue will be hotly debated at many businesses.
The second benefits issue facing New Zealand businesses is the KiwiSaver initiative, due to arrive 1 July 2007. Although final regulations have not yet been issued, employers with existing superannuation plans are already confronting the implications of this new regime.
Those with an existing superannuation plan face administering second tax-advantaged and possibly more generous plan alongside their own. Employers may decide to continue their current plans, revise these plans, or drop them altogether in favour of KiwiSaver to simplify life. Either way, they incur another set of administrative costs, round of employee communication and education, and general burden navigating through new national programme.
So, employers have some big decisions to make over the next year. What base salary movement will both retain staff and not pressure margins? Likewise, what benefits strategy will effectively control costs and lock in key staff?
We’ve already seen the first skirmishes in what may be tumultuous year. At TVNZ, members of the Public Service Association (PSA) and the Engineering, Printing and Manufacturing Union (EPMU) few months ago started agitating for five percent pay increase. This, they said, would go some way towards recognising CPI rises of 6.9 percent over the past two years. Since they already enjoy four weeks’ annual leave benefit, week above the minimum, they also requested five weeks to maintain the “perk”.
It will be interesting to see how such remuneration issues play out across number of organisations over th