The landscape for managing workforce reward has changed dramatically over the past 3 years. The emergence of the digital economy pre-pandemic – followed by the disruption and rapid transformation that has occurred during and post the pandemic, has led to significant shifts in operating models and ways of working.
This has also placed a lot of pressure on organisations to improve productivity and efficiency or face getting left behind – both of which have implications for how organisations reward their workforce.
Talent supply still impacting wage growth
This is happening at a time when low unemployment and skill shortages have placed upward pressure on salaries – strong demand across several industries for job families including cyber security, technology, engineering, healthcare, risk and finance showing increased movement in salaries and bidding for talent.
The tightness of the labour market is now resulting in many workers being able to bargain for significant pay rises; 21 percent of workers in the private sector saw their pay increase in the December 2022 quarter, with an average rise of 3.3 percent1, with the largest contribution to the pick-up coming from individual agreements. While wage growth is showing signs of softening as compared to the September quarter (0.8 percent vs 1.1 percent), it is higher than any December quarter increase across the last decade. In the past year, seasonally adjusted wages in the private sector rose by 3.6 percent, the highest pace in over a decade2.
A survey of 800 Australian managers and non-managers released by RMIT Online3 suggested many businesses are taking issue with outsized wage demands from jobseekers.
Of the 405 managers RMIT surveyed, 46 percent believe their companies had to overpay for new hires in the past year. And in a sign of the severe skills shortages plaguing the economy, four in 10 believe their new colleagues lack the skills and experience required to do their jobs.
The total reward affordability challenge
A key challenge facing many organisations in 2023 is how they manage wage growth that is being primed by inflation and not matched by productivity gains. This will place increased pressure on organisations with limited budgets to fund salary increases. Most organisations are not able to simply ‘chase’ market remuneration movements across all areas of the workforce. This means balancing the need to attract and retain key talent in a tight labour market, without creating a workforce cost structure that is not sustainable in the future.
In response to these challenges, the following considerations for reward management will be important as we navigate 2023:
- Adopting a more segmented approach to reward strategies in 2023, with a focus on areas where talent is critical to strategy and sustainability, and/or where the return on investment is highest. Knowing where your critical talent is now and how to engage and retain them will pay dividends. This may include using a different mix of total rewards including use of short and long term, cash and non-cash rewards.
- Using data to understand and track the diverse mix of intrinsic and extrinsic motivators across the workforce, to guide the alignment of the employee experience and total rewards to match key preferences. Over the past decade workforce preferences and expectations have been shifting. The overall employee experience, including “how, where and when I work, my development, and my connection to my employer’s purpose and social contribution to community” have become higher order needs for employees. Focusing on non-cash rewards and benefits can be an important differentiator that drives engagement, especially when upward pressure on salaries in 2023 will make it hard to compete on cash alone.
- A common source of frustration and challenge for clients in 2022, was the need to continue working with outdated rigid remuneration structures and policies. These are often blamed for creating an unnecessary clutter of tasks and activities that drive inefficiencies within HR teams, and a less than ideal HR service delivery experience for the business. In 2023, greater flexibility is needed to align remuneration strategies and processes to support new ways of working including the way agile work teams and contingent workforces are rewarded. This includes areas such as:
- ensuring salary structures that may have been in place for extended periods of time remain fit for purpose in 2023. This also includes testing job levelling and classification structures against the design of work, the way work is performed and how the workforce utilised, and
- simplifying remuneration policy frameworks to provide clearer guidance and transparency to managers and staff including market positioning, use of benchmark data, setting salaries for new hires and management of annual review processes.
- Focusing on improving gender equity around total rewards should be a priority to help improve attraction and retention of talent in 2023. Research from Workplace Gender Equality Agency (WGEA) still confirms the pay gap in Australia is 14.1 percent. A joint report4 between KPMG and the Diversity Council of Australia indicated that the pay gap in Australia is estimated to be close to $1 billion per week. Focusing on the underlying causes that contribute to the gap, including areas such as gender density and participation at higher levels of work and in key leadership positions (the pay gap is most prevalent at top management levels increasing from 8 percent to 18 percent when you look at persons earning in the top 20 percent versus those earning around the median), equal access to variable pay opportunities, and benefit arrangements that create an equitable total reward offering. Improving these underlying areas can help engage the workforce and improve overall productivity.
- Avoiding knee jerk reactions to requests for off cycle salary increases in 2023 that lock in long term fixed costs that may be unsustainable when market conditions change. Governance around any changes to salary outside the annual review should be a priority. This can help avoid any workforce reduction if cost pressures need to be addressed when market conditions change.
- Using corporate partnerships more strategically to offer benefits that help the workforce broadly deal with pressures arising from inflation and cost of living. Targeting areas that impact the majority of the workforce, this could include things like partnerships in the energy sector to help with rising household energy costs. This could also include partnering with suppliers of renewable energy solutions including solar panels, electric vehicles, and smart home solutions, providing awareness and easy access to these solutions, and making them more affordable.
- Use of longer term meaningful rewards – not just cash focused, as a means to driving retention and engagement of staff over longer time frames. This can help reduce focus on short term salary adjustments when budgets are restricted and there is volatility in the market. This may take the form of deferred cash based rewards, equity based rewards, or access to tiered benefits including things like accumulation of leave or additional superannuation contributions.
With ongoing change and volatility in the market, 2023 promises to be another challenging year for employers. At the same time, this also creates opportunities for organisations to differentiate their employee value proposition and create a compelling employee experience to attract and retain an engaged and productive workforce.
Find out more
As you work through 2023, if you want to discuss any of the above areas of focus, or ways KPMG Rem Desk can help you with your remuneration management, feel free to contact our team.
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- Wages growth hits highest annual pace in a decade.
- Wage Price Index, Australia, December 2022 | Australian Bureau of Statistics (abs.gov.au)
- “The Salary Trap” RMIT Online Research Report, September 2022.
- She's Price(d)less: The economics of the gender pay