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The myth of a fair CPI increase

Written by Christine Whelan on February 2nd, 2021.      0 comments


Written by Christine Whelan on February 2, 2021.

This article was published in the February Issue of New Zealand Management Magazine.

Our Strategic Pay Senior Consultant, Christine Whelan examines the debate around salary increases being based on CPI and why this may not be the best idea.
 

Let’s forget for a moment the fact that CPI doesn’t always move positively and consistently upwards – over the last 5 years it’s ranged between 0.5% and 2.5%, while the remuneration market movement has remained at a reasonably steady 2 – 3%. Remuneration market movements, since they inevitably reflect employers’ ability to pay, already take into account CPI, while not being driven solely by it.

Most organisations want to pay their employees fairly and equitably and for some of these organisations, the application of a percentage increase based on a commonly used and publicly
available number is the best course of action.

However, the use of an overall fl at CPI percentage increase as the basis of the annual salary increase for employees ensures that inequity is in fact increasingly entrenched in the organisation.

As an example, lets have a look at two colleagues who started at the same time in their organisation:

Jane and Joe are both employed in the exact same role in the organisation. Both have been in the organisation for 5 years. When Jane started work, she had significant experience and so was started on a salary of $60,000. Joe was newer to the type of role so was started on a lower salary of $55,000.

Each year at salary review time they both receive the fairly consistent CPI increase of 2%.

From a $5,000 salary difference in 2015, Joe in 2020 now earns $5,521 less than Jane.

While the percentage gap between salaries remains the same, if we dig a bit deeper, we find a problem.

The use of CPI takes no account of Joe’s growth in the role, or whether he delivers at a higher level than Jane. Let’s assume for a moment that over the last five years Jane has become a bit stale in the role – she still does the job competently and there are no performance issues but she’s not exactly setting the world on fire.

Joe, on the other hand, loves his work and over the years has come up with numerous practical suggestions to improve the way it’s done. He consistently delivers outcomes over and above those expected of him.

Unfortunately, the organisation’s policy of only applying the annual CPI increase means that Joe has now had enough. He’s moving on – to an organisation that prefers to reward performance and recognises his contribution.

As an employer you need to ensure that the right remuneration is paid in the right way to the right employees. Having a structure and policy around this makes your decision making and communication that much easier.

Understanding what you’re rewarding and how to structure salary increases is critical in retaining top talent. Ensuring you are linking base pay movements to performance outcomes also ensures you are rewarding what matters. You should consider what is right for your organisation and how to motivate your employees with both financial and non-financial rewards.

The myth of a fair CPI increase-891

How Strategic Pay can help

We work closely with organisations to ensure their linkages between remuneration and performance management are working and creating the desired return on investment. We can help you gain an understanding of the different approaches to the annual salary review and enhance your capability to make objective remuneration decisions considering timing, how to distribute the salary budget fairly and how to identify and retain top employees.

If you would like some expert advice, don't hesitate to contact us today at info@strategicpay.co.nz or regional contact details can be found here.

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