Wage growth strongest in years

by 01 Apr 2008

DESPITE TALK of an economic slowdown, salaries have risen by 4.7 per cent over the past 12 months – the highest movement in more than three years.

A survey of more than 380 organisations has found that pay for the same person in the same job (same incumbents) has increased by 4.7 per cent, up from last year’s 4.5 per cent increase. Meanwhile, overall fixed pay budgets rose by 4.4 per cent, which was an increase from the 4.2 per cent rise seen 12 months ago.

Continued salary growth could impact on inflation, said David Abusah, a principal in the human capital arm of Mercer, which conducted the survey.

“We’re seeing an interesting dilemma at the moment where there is mounting pressure from a broader economic policy perspective to curb wages growth, but employers are responding to pressure of another kind – to attract and retain the best talent,” Abusah said.

The fact the fixed pay budget increases are lower than same incumbent movements suggests companies are maintaining a strong focus on retaining existing talent, rather than simply relying on buying critical talent from outside the organisation, he said.

“For the third year running, attraction and retention ranks as the top reward issue facing businesses, with 93 per cent of employers rating it is a very important issue. With unemployment reaching a new record low last week and the skills shortage showing no sign of easing, it seems that pressure for wage growth will continue for some time yet,” Abusah said.

Against this backdrop, organisations are facing increasing pressure on their bottom line. However, taking a closer look, Abusah said the salary spoils are not being shared equally among all employees.

“Employers are getting more sophisticated and have begun to segment their workforce, paying more to those most in demand and critical to driving the business,” he said.

Of the 71 per cent of employers adopting a segmented approach to reward, the survey found that 40 per cent are differentiating their employees based on their level or rank within the organisation and 27 per cent are segmenting them by job family, responding to external market pressures.

At the same time, 23 per cent of employers are identifying the key value-drivers within the organisation and rewarding them differently in an attempt to increase the return on reward spend.

“With wage pressures expected to continue in these industries, the question is, how sustainable are these reward costs for companies? And if not sustainable, what reward elements or employee segments will be comprised to manage overall cost increases?” Abusah said.

In addition to wage growth pressures, there are potentially further costs in-store for employers as a result of imminent changes to ordinary time earnings (OTE) legislation.

Changes to superannuation guarantee legislation under OTE, set to take effect on 1 July 2008, may have significant cost implications for some organisations depending on their current definition of OTE.

As OTE legislation has expanded the definition of earnings to include items such as car allowances or performance bonuses, some employers may be facing increases in the cost of their Superannuation Guarantee Contribution requirements

“While there is a heightened level of awareness around OTE – 91 per cent of employers are aware of the imminent changes to calculating superannuation, compared with 85 per cent 12 months ago – the survey found one in four employers don’t know what the cost impact of OTE will be on their business,”Abusah said.

“The OTE changes present more than just a compliance issue and provide an opportunity for employers to review and tidy up their remuneration structures and communicate the true value of their reward offer to staff.”

For those who are feeling the pinch, attraction and retention goes well beyond financial reward.

“In the future, they will need to take a holistic approach, to include pay, benefits and careers – this will be critical, as will segmenting the employee population, tailoring reward programs and providing flexibility to ensure that key value drivers and different employee demographic segments are retained and engaged.”

For example, he said employees with children may require the flexibility to work from home for part of the week, while an older worker may need access to work-life balance programs that can ease them into retirement and ultimately, keep them in the workforce for longer. “Employers who can accommodate for employee expectations in the future will have an improved likelihood of retaining staff,” he said.

Abusah also referred to the findings of Mercer’s recent Workplace 2012study, which warned employers to be prepared for forecast changes in demographic profile of the Australian workforce, such as a greater number of workers aged over the age of 55 and a higher proportion of females in the workforce by the year 2012.

It also highlighted significant increases in the demand for some industries such as construction. Many industries and job families will continue to face labour shortages in 2012, creating continued upward pressures on wages, Abusah said.

“Companies will need to adopt appropriate strategies to obtain their required workforce, including an increased focus on building talent, and a sourcing and total reward strategy that targets a more diverse workforce,” he said.

The research found that employers will need to be ready to respond to trends such as a 14 per cent increase in the number of workers aged 55 and older, greater demand for flexible work arrangements, employee demands for greater flexibility in the employment model and increased talent supply pressures.


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