• In general, salary increases should reflect the employer’s pay practices and rewards philosophy which may include market competitiveness and performance. But there is many other factors which can play a role in rising salaries such as employee benefits costs, superannuation guarantee, cost of leave and more.
  • Employers need to consider all the factors that will impact remuneration packages when considering salary rises to ensure talent retention strategies are sustainable in the long term.

Salary Increases

What are the factors employers consider in setting salary increases? In general, salary increases should reflect the employer’s pay practices and rewards philosophy which may include market competitiveness and performance. Employers can also take into account the Average Weekly Ordinary Time Earnings (AWOTE) and/or the Consumer Price Index (CPI) published by the Australian Bureau of Statistics. We understand that Employers take a rigorous process to ensure that salary rises are reasonable, competitive, and sustainable.

In late 2019, after years of shrinking salary pools, Australia was experiencing the lowest official salary growth on record. The COVID-19 outbreak created economic uncertainty that caused wages growth to drop sharply again and bottom out below 1.5 percent before rebounding back to pre-pandemic levels in late 2021 [1]. On the other hand, prices have increased significantly in that period as measured by the CPI. Over the 12 months to December 2022, CPI was 7.8 percent, which is the highest since 1990 [2]. The rising cost of living pushes the need for higher salary rises in the short term. This is reflected in AWOTE of 4.5 percent at November 2023 [3] and increases in the national minimum wages effective 1 July 2023 of 8.6 percent (higher than 5.2 percent effective 1 July 2022)  [4]. We have also seen significant pay rises in 2023 for most of our clients compared to prior years. Although the CPI has declined since December 2022, the wage rises are lagging behind the increase in prices, still resulting in real wage decline (which has improved since December 2022) [3]. As the market recalibrates over time (as it usually does), salary rises are expected to revert to pre-pandemic levels.

Salary inflation graph

With significant pay rises in 2023 and having reached a higher base of salaries for future increases, employers should be aware of its implications in relation to the costs of salary related employee benefits.

Implications of Rising Salaries to Employee Benefit Costs

Rising salaries can impact  salary-based employee benefits which the employer needs to be mindful of when setting budgets. Aside from higher base pay, salary rises will increase the superannuation guarantee (SG) contributions [5], the cost of annual leave, the cost of any defined benefit (DB) superannuation programs, long service leave liabilities and possibly insurance premiums. Some of these may be overlooked until later when the impact of high pay rises have impacted the employer’s liabilities.

Cost of Superannuation Guarantee (SG) Contributions

Increase in wages would increase the SG contributions (up to capped salary amounts if capping is applied). Depending on how the salary is ‘packaged’ this could have significant impact to the employer. In the 2023 Aon Superannuation and Financial Wellbeing Survey [6], the analysis identified that employees’ wages can be provided as (1) Base Plus, (2) ‘Packaged’ or Remuneration Package or (3) a combination of both. Under Base Plus, the total wage is the base salary and the additional benefits including SG contributions are added on top. The Remuneration Package approach on the other hand, is based on an overall remuneration package value (fixed or total package) where any benefits (including SG contributions) are included in the overall package. According to Aon’s analysis of 117 participating organisations [6], the most common approach to remuneration and superannuation is the Base Plus approach (about 59 percent of participating organisations), followed by the Remuneration Package approach (about 27 percent of participating organisations) with the remaining 14 percent providing both approaches for different employee types. Those that provide Base Plus approach had an increase in cost for SG contributions due to higher salary rises in 2023.

Salary Inflation

Source: 2023 Aon Superannuation and Financial Wellbeing Survey [6]

The impact of increasing wages on SG contributions could be limited if employers limit salary on which they pay SG. According to the 2023 Aon Superannuation and Financial Wellbeing Survey [6], the majority of organisations who participated in the survey cap their SG contributions at the maximum contribution base (about 51 percent), or at the concessional contribution limit (24 percent) or based on the employee’s request (12 percent). The remaining 13 percent do not cap their SG contributions (a decline from the 19 percent in the previous year’s survey results).

As an example, consider two employees. Employee 1 has their package based on a Base Plus (base salary of $250,000) approach while Employee 2 has their package based on a Remuneration Packaged approach (package of $250,000). At the current minimum SG rate of 11 percent, the corresponding SG contributions are summarised in Table 1. It is assumed that their employers do not cap their SG contributions. Both receive the minimum SG contributions, but Employee 1 receives a higher amount. If both employees receive a 4 percent salary increase, then their corresponding SG contributions will increase by 4 percent with Employee 1 receiving a higher SG contribution amount.

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Salary Inflation

Table 1: Comparison of change in SG Contributions on both the Base Plus and Remuneration Package approaches, assuming no cap on SG contributions

If their employers apply the maximum contributions base (MCB) cap to their SG contributions, the SG contribution for Employee 1 is reduced as their base salary is above the MCB cap and there are no additional SG contributions even if there is a salary increase of 4 percent. The resulting SG contribution for Employee 2 on the other hand is the same as before applying the MCB cap.

Salary Inflation

Table 2: Comparison of change in SG Contributions on both the Base Plus and Remuneration Package approaches, assuming SG contributions are capped at the MCB.

Cost of Annual Leave

If wages rise, then employers’ liabilities in relation to the employees’ annual leave benefit will increase especially for those employees with large unused annual leave balances. The employer can mitigate the increasing cost by imposing leave policies that will minimise employees accruing large leave balances. For example, employers may provide reward leave to employees with no more than 2 days of annual leave remaining at the end of the fiscal year. Another may be to impose a mandatory holiday break during the Christmas and New Year period (a shutdown period) to ensure employees get a well-deserved rest during the festive holidays while minimising the employees’ accrued leave balances.

Cost of Defined Benefit (DB) Superannuation Liabilities or DB Plan

If the employer provides DB superannuation benefits for some or all employees, this will be impacted by the salary increases as most benefit designs are linked to salaries. We note that only some employers will be impacted as DB plans are no longer common in Australia. DB Plans are usually based on final average salary, and sometimes with a minimum accumulation benefit underpin to ensure that the benefit complies with the SG requirements. For organisations who offer these benefits, employees covered by the plan usually have extremely long tenure so the impact can be significant. Most funds are based on a 3-year average salary so it may take up to 3 years to see the full impact of higher salaries. Fortunately, in the current market environment, the discount rate used for valuing the DB Plan liabilities for financial statements has also increased which partially masks the salary increase impact. However, once the market recalibrates and goes back to a state where bond yields are lower, the impact of higher pay on DB Plan liabilities will be more evident.

Cost of Long Service Leave (LSL) Liabilities

In Australia, Long Service Leave (LSL) [7] is a mandatory employee benefit, so all organisations provide it. The benefit provisions and eligibility varies in each state and territory. The benefit is based on salary and cannot be taken until the employee is eligible (usually upon reaching 10 years of service or 7 years of service for VIC and ACT) unlike annual leave. The minimum annual LSL accrual is usually 4.33 days per year of service or 6.5 days per year of service for NT and SA. Some employers provide a more generous benefit eligibility and/or benefit accrual than what is required (e.g., 5 years of eligibility and 10 days of accrual per year, which is more generous than the statutory benefit). With the current tight labour market and talent shortages [8], it is hard for employers to allow their people to take their LSL whilst in service. Companies may be forced to increase the pay of these long-serving experienced staff so that they don’t lose them and the impact on the LSL liabilities could be large.

Similar to DB Plan liabilities, the discount rate for LSL liabilities has increased which partially masks the impact of higher salaries on company balance sheets. Consider a full-time employee, age 40, with 20 weeks of LSL balance, a salary of $150,000 and are eligible to take the leave whilst in service or upon termination after 5 years of service. The graph below summarises the employee’s LSL liability based on different market scenarios.

Salary Inflation

Graph: Illustration of an employee’s LSL liability based on different market scenarios.

*Liabilities are for illustration only to show the impact of salary changes and discount rate changes to the cost of LSL. All other assumptions and provisions are the same between the scenarios.

A 200 basis points increase in salary increase assumption will increase the LSL liability by at least 11 percent. A 200 basis points increase to the discount rate assumption will decrease the LSL liability by at least 10 percent. Under the current market environment where discount rates are high, the impact of higher pay rises are not as prominent as when the discount rates are low.

To help lower this cost, Employers can encourage their employees to take LSL whilst in service so that the LSL balance is lower. However, note that this has its own pros and cons considering the persistent issue on tight labour market and talent shortages [8]. Employers should also note that SG contributions are required to be paid if LSL is taken in service but not required to be paid on the payment of LSL on termination.

Insurance Premiums

Employers who pay for Salary Continuance Insurance (SCI) and/or Death and Total & Permanent Disablement (TPD) Insurance may also see an increase in premium cost due to higher cover as by nature SCI is based on salary and most Death and TPD arrangements where the employer pays are a fixed multiple of salary or a formula based on future service generally to age 65 times salary.

As there are cover limits, particularly for SCI, the increase can be contained for employees with higher incomes, however the limits for Death and TPD may not apply as they tend to be high where employees who exceed automatic cover limits undergo underwriting.

Employers may have an option to reduce or remove this benefit, however, these items do help firms provide benefits to maintain their remuneration package competitiveness and provide a benefit that is cheaper than an additional percentage or two salary rise.


Employers need to consider all the factors that will impact remuneration packages when considering salary rises to provide a sustainable remuneration strategy that are competitive and can support their organisation’s talent retention strategies and are sustainable in the long-term.

Employers should know the market and what their competitors are doing. Employers must realise that there are other components of the employee benefit package which are often overlooked that are affected if there are market changes and that they must consider these ripple effects to make informed decisions before jumping onto the ‘pay higher salaries’ band wagon.

Employers can make use of relevant reports (i.e., Remuneration, Benefits and Superannuation and Financial Wellbeing reports) which may help their organisations interpret and respond to employment market data so they can make better informed business decisions. They can also seek assistance from subject matter experts to estimate and manage the costs due to market changes in relation to remuneration and other salary related employer benefits costs.



1Managing the Impact of Inflation on Salaries | Aon Insights and What is Really Happening with Wages Growth in Australia? | Aon Insights

2 ‘Consumer Price Index, Australia’ 25 January 2023.

3’verage Weekly Earnings, Australia’, Australian Bureau of Statistics,, released 22 February 2024.

4The national minimum wage | Fair Work Commission (

5Super guarantee, Australian Taxation Office, accessed

62023 Aon Superannuation and Financial Wellbeing Survey.

7’Long service leave’,Fair Work Ombudsman, .

8 ‘Skilled worker shortage makes recruiting for boom times a challenge’ Australian Financial Review,, accessed


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