Stagnating or Skyrocketing? What is Really Happening with Wages Growth in Australia?
In late 2019, after years of shrinking salary pools, Australia was experiencing the lowest official wages growth on record, and people were beginning to wonder how low, and for how much longer, this could go on.
Then the pandemic hit, creating an economic jolt and uncertainty that caused wages growth to drop sharply again and bottom out below 1.5 per cent, before rebounding back to pre-pandemic levels in late 20211.
The question is, are we back where we were before COVID-19, with stagnating wages? Or should we expect some further recovery in the short-term?
Many organisations consider the rate of inflation when determining annual budgets. Afterall, no-one wants to be accused of sending real wages backward without good reason. At the time of writing, inflation was running at 3.5 per cent but it has fluctuated so severely since 2019 that taking a point-in-time inflation figure to apply to salary budget considerations could paint a misleading picture2.
The most extreme ups and downs were largely a side effect of pandemic policies, including the provision of temporary free childcare and the fall in demand for fuel in 2020, both of which rebounded in 2021 as these expenses returned to normal. However, even after considering these factors, there seems to be a more persistent rise in costs that is emerging, attributed to global supply chain issues, rising costs of materials and increased demand. After unusual, one-off fluctuations such as these are out of the equation, core inflation is running closer to 2.6 percent, still higher than most annual remuneration budgets for the past few years.
Throughout the pandemic, economic and social conditions have been front of mind for executives and board members tasked with remuneration budget decisions. However, although they are useful to some extent, official measures of wages growth, inflation and unemployment are only a broad indicator of what’s going on in Australia’s employment market.
That’s why it is essential for decision makers to access more detailed information. Aon’s Australian General Industry Remuneration Report (November 2021)3, for example, draws data from over 200,000 individual employees and tells us not only about current remuneration rates for more than 500 positions, but also measures the year-on-year changes in remuneration spend by job family, career level, and organisation size. This data tells a more nuanced story about what is happening on the ground, which can help HR and Rewards professionals better understand and prepare for the changes and challenges on the horizon for 2022.
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Outlook for 2022
Aon’s remuneration reports suggest this year will see a further thawing of the wage freezes that were implemented in 2020, with only 17 percent of the ‘same incumbents’ (people who have been in the same job with the same employer for more than 12 months) receiving a zero increase in 2021 compared to 31 percent in 2020. For incumbents who saw an increase, the median was 2.3 per cent fixed remuneration movement, up from 1.2 per cent a year earlier. So, overall increases rose but were still subdued.
However, what about people who changed employers during the past 12 months? There are plenty of anecdotes about people resigning from their jobs for big pay increases in 2021. However, if the market is only growing by 2.3 percent, does that mean these stories are overblown? The answer is, yes and no.
On one hand, the stories appear overblown because, pending the Great Resignation hitting our shores, the proportion of people on Aon’s database who are newly hired and receiving a larger salary than before is small compared to the overall population, most of whom haven’t changed jobs and are making do with the now normal 2 percent annual increases. So, a small proportion of newly hired, well-paid employees won’t shift the market median much, if at all. However, on the other hand, these stories may not be overblown in terms of the sizeable pay rises available to individuals who change employers. They are just outliers to the main trend. But for how long?
To explore further, Aon looked at compa-ratios (the measure of an individual’s salary as a percentage of market median) for people in our general industry database who were hired in 2021. We found that, for some job families, new hire compa-ratios were up to 6 percent above market median for the role, with corporate IT, strategy, project management, logistics and supply chain, and facilities roles all hired at above market median. The results are even more dramatic when IT specialisations are examined more closely. Even those job families paying below market median, such as administration, customer service, marketing, sales, and manufacturing, were still 95 percent of the median. This means, employers who offer new hires less than the median market rate for key roles may struggle to find people willing to join them.
In many instances new hires are commanding higher than market median rates and some individuals who have weathered low increases for many years are seeing a significant and compelling increase. While many organisations have improved how they articulate and demonstrate their employee value proposition during the pandemic, with increased focus on wellbeing, flexibility and balance, those initiatives can’t always compete when an employee is offered a 20 percent or higher salary increase from a potential new employer.
A further implication of increasing new hire pay rates is that, unless there is a review of existing employees’ pay, organisations that hire at rates above the market median could create inequity and, with it, disengagement.
New hires are routinely being recruited for salaries higher than market median.
Aon’s general industry database shows a median forecast budget increase of 2.6 per cent (which is the same as the current core inflation rate and would not equate to a real wage increase). However, across our complete range of remuneration surveys, median forecasts of 2.0 – 4.0 per cent are apparent, depending on the sector. We also hear from some clients who are doubling their budgets after a closer look at the latest market data and insights and after assessing their current position with an eye firmly fixed on attracting and retaining talent in 2022. So, Aon expects to finally see remuneration increasing at higher than pre-pandemic levels, perhaps edging closer to 3.0 per cent throughout 2022.
What does this mean for remuneration reviews?
Don’t treat the 2022 remuneration review cycle as business as usual, with 2.0 per cent for meets expectations and 2.5 per cent for high performers.
A great place to start the process is to understand where you stand by:
- Understanding how your salaries compete in your market
- Examining your new hire compa-ratios
- Knowing the talent trends in your market
- Getting clear on your strategy regarding new hires, internal equality, and links between pay and performance
It’s not uncommon for organisations to allocate one budget for remuneration reviews and another for dealing with challenges, such as securing in-demand talent or counter offers to avoid unexpected resignations. That approach can become expensive, though, so it is essential to develop a strategy that is informed by robust internal and external data, which can help you prioritise and build a business case for additional funding.
Depending on your key risks, you might focus on ways to meaningfully differentiate reward for high performers, or on ensuring a market competitive salary for employees who are key to delivering on the strategy. In Aon’s 2021 Global Risk Management Survey4, released in December 2021, Australian organisations identified ‘failure to attract and retain top talent’ as their fifth biggest risk, up from 7th place in 2019. So, there’s never been a better time to dive into the detail when it comes to total rewards and remuneration.
To learn how Aon’s Rewards Solutions team can help you with total rewards data, remuneration training, benefits data and advice on a wide range of human capital issues, please contact Denise Tzavaris on +61 2 9253 8257 or read more about our reports and research.
References
- See Chart 1. Australian Bureau of Statistics data
- See Chart 2. Australian Bureau of Statistics data
- Aon’s 2021 Australian General Industry Remuneration Report
com.au/Home/Resources/Reports-and-research/Australian-General-Industry-Rem-Report - Aon’s 2021 Global Risk Management Survey aon.com/2021-global-risk-management-survey/index.html