A new year, a new Prime Minister, a different pay landscape?

There is a clear indication from the private sector that a higher percentage are now expecting to see larger remuneration increases than in previous years. By John McGill.

In the recent round of Strategic Pay Remuneration Briefings we highlighted the relatively low movements we have seen in our database in the past year and the likelihood that these will continue in the following 12 months. Given that the latter information was based on client data regarding anticipated payroll increases we believe we were on safe ground making these predictions.

What has changed in the past six months is a clear indication from our private sector clients that a shift has occurred in their expectations over the next year, it’s not dramatic but a higher percentage are now expecting to see larger increases than in previous years. Our public sector forecasts remain unchanged with the new Prime Minister’s firm grip on spending clearly still evident. A more interesting question at present is what is leading to this increased optimism within the private sector?

The healthy economy, further infrastructure spending (which will be given an additional boost by the devastation caused by the quakes in Kaikoura, we suggest), the government accounts in rude good health, falling unemployment and rising concerns around skilled labour shortages are among the reasons.

The NZIER Business Opinion Survey results are very clear on the rising skill shortages and their recent quarterly results show this trend very clearly. 

We have been hearing anecdotal comments all year around skill shortages, comments we have taken with a grain of salt. The most recent statistics do however suggest that problems are mounting. The trend developing around pay pressures will be for the isolated instances to gradually put pressure on overall pay levels and lead to a revision of budget forecasts going forward. 

What sort of increases are we likely to see? Upwards of one half to one full percent is our estimate at present with the pressure continuing to occur initially in the private sector.

The absence of any adjustment to tax thresholds (from the likely new Prime Minister again) will put severe pressure on public sector pay rates, we believe. The movements will have to be clear and obvious before government will react and then, as we have seen in recent years, with reluctance.

The benign environment holding down pay movements (low interest rates, relatively high unemployment, solid primary sector prices across most of our exports, high exchange rates insulating us against global inflation, low petrol prices, to name the usual group) is historically unusual and not stable in any sense of the word. It could easily change and this could occur very quickly. Should that happen then the pressure to adjust pay levels would be dramatic.

The general economic health means that many organisations are likely to have some greater capacity than previously for higher pay increases than in previous years. The difficulty they will face is if the increases are made in terms of the fixed elements of pay rather than through variable pay mechanisms. If we fall back on giving fixed pay increases we unfortunately run the danger of repeating the mistakes of the past.  M

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