Avoid These Common Salary Review Mistakes That Cost Your Business

As businesses approach the end of the year, salary reviews become a focal point for organisations and employees alike. These reviews not only impact financial wellbeing but also play a significant role in fostering employee satisfaction, retention, and overall morale. Amid rising living costs and a competitive job market in New Zealand, salary reviews are an opportunity to solidify trust and commitment between employers and their teams.

Recent data indicates that New Zealand’s median annual salary has seen steady growth, but significant disparities remain, particularly across industries grappling with economic uncertainty. Meanwhile, trends such as “quiet quitting” and heightened employee expectations highlight a growing need for fairness and transparency in remuneration practices. Employers who ignore these factors risk losing talent, incurring higher recruitment costs, and damaging workplace morale.

Additionally, businesses are increasingly recognising that pay equity and clear communication are critical to sustaining a motivated workforce. Unequal pay practices and the absence of transparent salary review processes can exacerbate dissatisfaction, particularly as employees become more vocal about expectations. Employers need to consider not only legal compliance but also how they align with market competitiveness and employee perceptions. The cost of inaction is significant, with studies consistently showing the financial and cultural damage caused by undervaluing staff. A well-structured salary review process is not just about numbers; it is about creating an environment where employees feel valued and supported.

“If you’re not explaining salary decisions to individuals, you risk losing their trust.”

During the NZ Market Update, Shannon Barlow, NZ Managing Director of Frog Recruitment, and Lizzie Van Winden, Health, Safety, and Environment Manager at ACCOR, explored the complexities of salary reviews. They underscored the importance of aligning salary reviews with broader workforce strategies, ensuring compliance, and fostering trust.

One key point was the importance of transparency in the process. Employers should clearly communicate the criteria and methods used in salary decisions. Lizzie explained, “You’ve got to respect your team. If you’re not explaining salary decisions to individuals, you risk losing their trust.” Shannon reinforced this by stating, “The last thing you need is a gap in expectations or for outcomes to come as a surprise. Setting the context early in the year can mitigate these challenges.” These insights highlight how proactive communication year-round can reinforce trust and prevent misunderstandings during the review period.

The speakers also discussed the importance of recognising employees for additional responsibilities. Lizzie pointed out, “If you’re putting someone in a role and not giving them the salary to match, it can lead to disengagement and quiet quitting.” This practice, often referred to as "dry promotions," not only erodes employee morale but can also contribute to increased turnover. Shannon added that when salary increases are not feasible, employers should explore other ways to reward employees, such as flexible working arrangements or professional development opportunities, to maintain loyalty and satisfaction.

Market competitiveness emerged as another critical theme. Lizzie stressed, “If you’re not competitive, you’re most likely going to be spending more on recruitment to replace the roles you’ve lost.” Employers need to benchmark salaries against industry standards to attract and retain top talent. Shannon elaborated, noting that being attuned to market trends ensures businesses avoid unnecessary costs associated with high turnover and unfilled roles.

Pay equity was also highlighted as a crucial consideration. Lizzie remarked, “Unequal pay practices, whether intentional or not, can create huge morale issues, especially when team members compare salaries.” Shannon agreed, adding that fairness is essential not just for morale but also for reinforcing organisational integrity. When pay structures lack consistency, employees may feel undervalued, leading to dissatisfaction and disengagement.

Finally, the speakers emphasised the importance of a holistic approach to employee satisfaction. While salary reviews are a key component, Lizzie pointed out, “It’s not just about focusing on financial rewards. Positive workplace culture, flexible arrangements, and career development are equally important.” Shannon echoed this sentiment, noting that alternative benefits can bridge the gap when financial rewards are constrained, ensuring employees feel recognised and supported.

Practical Tips for Conducting Effective Salary Reviews

To ensure salary reviews contribute positively to organisational goals and employee satisfaction, consider these strategies:

1. Market Competitiveness: Regularly benchmark salaries against industry standards to ensure your organisation remains attractive to both current and prospective employees.
   
   
2. Legal Compliance: Adhere to minimum wage laws and employment regulations to safeguard your organisation and demonstrate a commitment to fairness.
   
   
3. Fairness and Equity: Maintain consistency in pay practices, ensuring employees performing similar roles are compensated equally. Inequities can lead to dissatisfaction and potential reputational damage.
   
   
4. Holistic Approach: Offer non-financial benefits, such as flexible schedules and wellness programmes, to enhance employee satisfaction when salary increases are constrained.
   
   
5. Year-Round Engagement: Salary reviews should reflect ongoing conversations about performance and expectations. Regular check-ins can prevent surprises and build trust.
   
   
6. Recognition of Extra Responsibilities: When employees take on additional duties, ensure their pay reflects their contributions or offer other forms of recognition to maintain engagement.
   
   
7. Feedback Integration: Actively seek employee feedback and integrate it into the review process to demonstrate that their opinions are valued and acted upon.
   
   

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