How do you manage pay relativity when minimum wage increases?

The concept of relativity squeeze or wage compression becomes even more relevant during this time in Aotearoa, New Zealand – a challenging time with increasing inflation and a tight labour market. 

What is relativity squeeze, or wage compression?

This occurs when pay differences for different jobs or employees get pushed closer together: 

• The margins in pay between first-line employees and supervisors/ managers become smaller 

• There is little difference in pay between tenured employees and new hires 

It helps to understand why it happens in the first place. 

Minimum wage increased in April this year, and will make it difficult for businesses and organisations to maintain relativities for their staff. When first-line employees receive a legally mandated pay increase, ideally all roles within an organisation should be reviewed to ensure pay levels make sense compared to the new minimum wage. However, not all businesses have the budget to do this, especially given that the minimum wage is getting closer to the living wage. 

To make it even harder, a tight labour market requires organisations to offer competitive salaries to attract high-demand professionals. The market rate for starting salaries in such cases increases faster than organisations can afford to give raises to existing employees. 

It is necessary for employers to review the pay levels to ensure there are appropriate pay relativity for these reasons: 

• Relativity squeeze hurts employees’ morale and causes frustration. Little difference in remuneration across skill levels, experience, tenure and qualifications may make your senior employees feel undervalued and demotivated.  

• Relativity squeeze encourages turnover as your talent decide to look for better opportunities elsewhere. This in turns affects your human capital and organisational sustainability as it may become a never-ending loop – if you can’t afford to retain your people, will you be able to afford to hire new talent on a competitive package? 

Determine a strategy for managing pay relativity

Employers must understand their budget, manage affordability, properly understand workforce expectations, and manage them proactively and in a timely manner. 

1. Make the legally mandated piece happen first and foremost. 

Advise the employees who are on the minimum wage the increase they will be getting. You should send them a letter or email (variation of employment contract) advising them of the change. Check your payroll systems and processes and make sure you are ready to implement the change at the right time.  

2. Remuneration review within the organisation as well as benchmarking with external market rate 

Many organisations have their remuneration reviews during this time of the year – especially where it coincides with the end of their financial year. Regardless of the timing, make sure your intention is well communicated with all your employees to reassure them that you are proactively managing pay relativity.  

Principles to follow when reviewing and redesigning your remuneration: 

• Legal compliance 
• Fairness and pay equity 
• Transparency 
• Collaboration and employee involvement 
• Alignment with business objectives, strategy and capability 
• Market competitiveness 

Strategic Pay Job Evaluation tools: 

• SP10 > ten factor job evaluation methodology 
• SP5 > proprietary five factor job evaluation methodology 
• JOBWISE > job mapping framework designed around career pathways 

3. Remuneration packages are not always about monetary values 

Small to medium-sized businesses occupy most of New Zealand’s economy, and many are struggling financially to attract and retain talent in this market. Pay increases (that are not legally mandated) are not always a viable option to maintain the pay relativity given the limited budget.  

What should we do? Get creative! 

Get an open and honest conversation going. This is easy to say, but in practice not many organisations are good at this. It is important to communicate in an authentic way with your people to better support them. Transparent communication is fundamental for a healthy workplace culture where employees feel valued, cared for and trusted. 

Offer flexibility. Many studies have shown that flexibility is the benefit most highly valued by people. Employee attitudes have shifted towards valuing a better work-life balance. In fact, you may find employees mentally trade salary in exchange for more flexibility if it’s relevant to them. HRNZ’s quick poll on HR professionals’ opinions showed that nearly 70% of the respondents stated that flexible working options is the single most important way to ensure talent retention. 

Support your employees throughout the tough times. Your employees may be suffering due to inflation, the cost of living crisis, unexpected events, and a feeling of uncertainty about what the future holds. Research has found that Kiwis spend 13 hours of work time a month worrying about money! Educate your employees about your organisation’s support, offer financial literacy programmes and other initiatives, etc. Find out more. 

Restructure compensation as a mix of base and variable pay, and non-monetary benefits. Include health and welfare benefits, EAP, allowances, paid time off, Kiwisaver, etc. Especially during the hard times, try different ways to support your employees’ whanau better – for example, EAP for employees and their families. 

Focus on their personal growth. Many young professionals prioritise learning & development opportunities over monetary bonuses, especially in their early career. You can outsource external training providers, upskill your employees within their current roles, or create opportunities for them to learn from different parts of the business. Mentoring/coaching or having a work buddy are also good options. 

Career progression conversation is an elegant tool in talent management: Take the time to ask your employees what support they need to find more fulfilling careers and how they can be best supported. Good career conversations drill down to find motivators and are backed up by upskilling/ reskilling resources. Consider a hiring freeze – a scenario where an organisation stops hiring new employees or creating new positions to be filled. This way you can focus on your current talent and try out different succession planning.