Salary expectations at odds with reality

Projected salary increases are looking a lot lower than they have been in the last 18-24 months, writes Cathy Hendry.

The trading conditions for most organisations in 2023 were tough. After more than two years of a buoyant economy many organisations are now experiencing slowing demand, increasing costs and lower profits.

This hasn’t been limited to small businesses either, with many big name, listed organisations reporting lower profits, or even losses over the last 12 months.

If we consider how most employees are faring, many homeowners have likely just fixed their mortgages or are looking at fixing them over the next year at significantly higher rates.

After nearly two years of high inflation, most households have already had to tighten their belts on spending and, if they are also about to face higher repayments, most will be feeling the pressure to increase their income to meet any shortfalls.

Typically, these discussions will happen at the annual salary review time, and it is likely that employee expectations will be for increases to match inflation, particularly given the last couple of years where salary increases have been the highest we have seen in a long time.

However, wage inflation or market movement doesn’t have a direct link to CPI or inflation; there are other factors in the labour market, most importantly supply and demand.

While the high inflation helped to drive our high wage movement over the last 24 months, the wider issue driving this was that of severe labour shortages which in turn led to an employee-led market.

Most organisations chose to increase salaries in order to retain key talent and, as a result, New Zealand experienced very high wage movement.

The labour market in 2024 is a different picture

The labour market in 2024 is a different picture. Following record net migration and reducing consumer demand, organisations are no longer reporting difficulty in finding skilled or un-skilled labour.

As a result, projected salary increases are looking a lot lower than they have been in the last 18-24 months.

These two different perspectives are likely to come to a head come annual review time, with employee expectations at odds with what employers are willing, or able, to offer.

Unfortunately, there are not really any options for organisations to help overcome this as there is unlikely to be the option to find a happy middle ground that will suit both parties.

There is one key tool for managers to consider and that is communication

There is, however, one key tool for managers to consider and that is communication.

While lower pay increases are a tough pill to swallow, it is possible to clearly communicate the impact of a slowing economy on business outcomes and profitability, together with the key decisions that have to be made when setting budgets to ensure future bill commitments can be met.

Communicating early and setting expectations on what has been budgeted for increases, how those decisions have been made and how they will be distributed can help demystify the process and potentially re-set expectations come salary review time.

Organisations that front foot this issue early, should be able to bring employees on the journey and, hopefully, reduce the blow of lower pay increases in 2024.

Cathy Hendry is the managing director at Strategic Pay.


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