Chapter 10

Pay Increase? You Must Be Joking!

In This Chapter

arrow Increasing wages according to the law

arrow Understanding that rewarding good performance is more than a stab in the dark

arrow Considering the market when setting base wages

Money can’t buy happiness, but it can make you awfully comfortable while you’re being miserable.

Clare Boothe Luce

O ne side of the wage–work bargain is obviously wages. Money for living. Money rewarding good work. Money for skills. Money for holidays and money to compensate every conceivable eventuality. In Chapter 5, I explain the impact of statutory minimum wages, allowances, penalties and loadings underpinning all Australian employment relationships. In this chapter, I explore how you should establish your own policy on how much you pay to attract and retain employees, and the mix of cash, bonus and fringe benefits that may entail.

Decisions on wages and salaries shouldn’t occur in a vacuum. I describe how to find out how much your competitors are paying staff and where you should place your wages policy in the broader wages market.

Finally, I tie the disparate threads of minimum wage obligations, over-award payments, fringe benefits, and incentive payments together to explain how you can meld the inevitable wage increases to rewards for good to excellent work performance, retain key staff and place your business in a good position to recruit and pay the right people for your business.

Adjusting Base Rates of Pay

Nobody offers small-business owners a regular pay increase but staff are rarely satisfied with a wage that never changes. Employees expect that the wages paid at the commencement of employment will be adjusted regularly to at least keep pace with inflation. This expectation is fuelled by the traditional Australian spectacle of regulatory authorities such as the Fair Work Commission reviewing and adjusting minimum wages and allowances every year.

These serious and august bodies listen to all sorts of employers, industry represents and trade unions on the subject of what is right and fair, and take into account various economic and social factors in deciding to adjust the minimum rates. You have little to no control over these decisions but you must ensure that your small business pays staff in accordance with these ever moving statutory minimum standards.

A lot of mystery and misunderstanding surrounds this process of minimum rate adjustment and what it actually means for business, so in the following sections I unravel it for you.

remember_4c.eps Modern award minimum rates and the national minimum wage (NMW) are not negotiable (refer to Chapter 5 for more on these). Both minimum rate mechanisms are also regularly adjusted (never downwards) and usually apply from the nearest pay period ­commencing on or immediately after 1 July each year.

Recognising skills and experience

Some modern awards prescribe multiple pay points within each wage classification, reflecting the acquisition and application of new or enhanced skills as employees continue their employment in that job. Where a wage classification in a modern award applicable to your staff has multiple pay points, your staff are eligible for progression to the higher pay points only where they have completed 12 months of continuous service in a classification level and have satisfactorily demonstrated their competence in the job. These wage increments are also minimum base rates.

tip_4c.eps Focus on identifying the modern award that covers your business and the classification description that applies to your employees. This is a skill that will help you comply with the law and save you money in the long term.

Paying above minimum wages

Minimum wages are just that — the minimum. You may pay employees more than the statutory minimums prescribed by modern awards and the NMW. This is the realm of over-award payments and here you have the greatest opportunity to link wages to performance and, therefore, extract the best value from the cost of employing staff and obtaining good work performance.

You may pay over-award wages for the following reasons:

  • To attract the best person to perform the job
  • To cover the extra hours of work that the person is expected to perform
  • In recognition of higher qualifications
  • To provide some incentive to better performance

Unlike statutory minimum wages, over-award payments to staff are negotiable. This basic fundamental fact has several implications for the way in which you can manage over-award payments.

Absorbing minimum wage adjustments

Adjustments to the basic minimum wage prescribed in modern awards and the NMW may be absorbed by the higher over-award component of the wage or salary you already pay to your staff. For example, an employee in charge of a fast-food shop or delivery outlet was entitled to a minimum wage of approximately $745 per week in 2013–14 under the Fast Food Industry Award. If you actually pay that employee in charge $800 per week, any yearly adjustment of the minimum award wage (for example, $12), up to the amount you already pay, isn’t required to be added to the actual wage. The $12 increase may be absorbed in the over-award payment of $55 per week unless you agree to pass it on to your staff.

Rolling-up penalties, loading and overtime

Administrative simplicity is another reason to pay more than the minimum award wage. Employees may work evenings, weekends, public holidays, or more than 38 hours per week. Unless an over-award payment is made, the employees are entitled to penalties, loadings and overtime payments, which can be complex.

As long as the over-award payment amounts to the same or more than what employees would have received in penalties, loadings and overtime, rolling-up the obligations in the single hourly, weekly or yearly wage is a convenient and simple method of employing staff. The periods in which to measure the rolled-up wage with the award rates is usually 12 months.

Recognising skills and experience

Modern award minimum wages often prescribe higher rates or higher commencement rates for employees who hold qualifications in a specialist field or area of expertise. As well as this, you also have a good opportunity to apply your own policy of paying higher amounts of wages, or allowances to employees who hold or acquire qualifications in a field that assists your business and leads to better work performance.

Such payments provide an incentive to employees to develop their knowledge and improve their competence in the areas of work that contribute to business success.

Rewarding Good Performance

Whether the wage is a minimum rate prescribed by the modern award or contains over-award payments, the total package of wages or salary is a substantial contributor to the cost of running a business and, therefore, your challenge is to extract value from the expenditure.

The way to do this is to design and apply a remuneration policy tailored to reward good performance. Sounds simple? Well, of course, you don’t want a policy that rewards poor performance. However, unless you think about the way in which employees earn money, this may be exactly what you end up with.

For example, a small factory producing component parts for automobiles may employ staff on minimum rates during Monday to Friday and overtime rates on Saturdays. Saturday overtime is worked to satisfy the fluctuating demands of customers for car parts. Staff may work out pretty quickly that the best way to reap the best reward is to ensure that production levels during the week remain low or static so that regular overtime is offered on Saturdays at the higher rates of pay. If you were the owner of this business, you’d need to re-engineer your wages policy to reward behaviour that produces more component parts during Monday to Friday.

A job well done is its own reward . . . sometimes

Your task is to ensure your wages policy complements the other measures you have in place to motivate employees to produce good work performance (refer to Chapter 9 for more on these other measures). You can break it down as follows:

  • Offer a basic wage that’s compliant with statutory minimum rates and is considered fair and equitable when measured against the broader market of remuneration for the applicable occupation or profession.
  • Design over-award payments for administrative simplicity, to compensate effort that goes beyond the standard working week, and to recognise additional or specialist expertise that produces higher level work performance.
  • Adjust the basic minimum rates to keep pace with statutory obligations and cost of living and, therefore, maintain the real value of the remuneration package for the employee.
  • Offer allowances to compensate for expenses incurred during the course of performing work for your business.
  • Provide fringe benefits to encourage loyalty and reward very good performing staff, such as private use of business vehicles and access to corporate hospitality (seats at sporting venues, theatres and cultural events — see the following section).
  • Use incentives and bonus payments to reward exceptional performance that increases the revenue of the business (see the section ‘Paying bonuses and incentives’, later in this chapter).

Providing fringe benefits and other rewards

Once upon a time you could reward employees with a mixed bag of benefits that were not necessarily in the form of cash and did not attract taxation. No longer is that the case as most fringe benefits attract the highest marginal rate of personal taxation and — worse — you, the employer, must pay the fringe benefit tax (refer to Chapter 6 for more on this, and for a list of the types of benefits that aren’t fringe benefits and so aren’t subject to FBT).

Nevertheless, you can organise the salary package to maximise the net benefit to you and staff.

Salary sacrifice

Fringe benefits are often provided either as part of an agreed salary sacrifice arrangement with employees, or ad hoc to suit the often personal and informal rewards offered to employees for the valuable contribution that they make to the business. The most common benefits that employees sacrifice part of their pre-tax salary for are superannuation and cars (that is, the payments into superannuation or to pay off their car come out before tax, meaning the employees’ taxable amount is reduced). The most common ad hoc fringe benefits are hospitality and travel gifts such as movie tickets, dinner vouchers and holiday packages.

An effective salary sacrifice arrangement is subject to fringe benefit tax (or superannuation guarantee) rather than income tax, including the exemptions and tax-free thresholds applicable to particular benefits.

An ‘effective salary sacrifice arrangement’ satisfies the following conditions:

  • The arrangement must be entered into before the work (that is to be remunerated) is performed. The ATO will not accept as effective an arrangement to sacrifice salary for work that has already been performed by the employee.
  • Subject to the terms of any contract of employment, the arrangement can be renegotiated at any time. Where a renewable contract is in place, you and your employee may renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.
  • The sacrificed salary must be permanently forgone for the period of the arrangement. If a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

remember_4c.eps Salaries and wages, leave entitlements, bonuses or commissions that accrued before the arrangement was entered into cannot be part of an effective salary sacrifice arrangement. Similarly, if you make payments to a third party from salary that has been earned for things such as health insurance premiums, loan repayments, union fees or credit card repayments, these payments do not constitute an effective salary sacrifice arrangement. They are made from after-tax or net amounts of salary.

tip_4c.eps You and your staff should document all the terms of any salary sacrifice arrangement. This may take the form of a term of the employment contract, or a separately documented agreement.

Providing business vehicles for private use

Providing a company car, truck or van for private use of an employee can be complicated where such use attracts FBT.

According to the ATO (www.ato.gov.au), an employee’s use of a taxi, panel van, utility or other commercial vehicle (that is, one not designed principally to carry passengers) is FBT-exempt if the employee’s private use of such a vehicle is limited to:

  • Travel between home and work
  • Travel that is incidental to travel in the course of duties of employment
  • Non-work related use that is minor, infrequent and irregular (for example, occasional use of the vehicle to remove domestic rubbish)

The exemption also applies to non-work related use by an employee’s wife, husband or other family member that is minor, infrequent and irregular.

The ATO says dual cabs qualify for the work-related use FBT exemption only if:

  • They’re designed to carry a load of one tonne or more, or more than eight passengers.
  • While having a designed load capacity of less than one tonne, they’re not designed for the principal purpose of carrying passengers.

Providing a car or allowing private use of business vehicles can still be a tax-effective means of remuneration for an employee under a salary sacrifice arrangement. See the sidebar ‘Tax impact of salary sacrifice’ for an example that works through the various issues.

Paying bonuses and incentives

Bonuses and incentives are paid to reward above average or exceptional performance. They can be paid for past performance that was exceptional or unexpected (bonuses) or in recognition of targeted and precisely measured performance that delivers a quantifiable result for the business, usually sales revenue (incentives).

No perfect formula exists for such payments. The only rule is that the payment should be made in recognition of performance that delivers a clear and quantifiable benefit to your small business.

Individual incentives and bonuses

Payment of individual incentives and bonus payments is sometimes a philosophical decision as much as a practical business choice. You want to recognise individual effort, which is fine as long as you understand that the reward truly must recognise and reward individual effort. No man or woman is an island and so don’t forget that the individual result may occur due to collective effort — for example, the office-based staff who supports the sales staff. Failure to recognise and reward the support team may lead to resentment, conflict and lessening of performance from those who have not been rewarded.

Individual incentives are usually paid to sales-type employees who rely on sales to justify continuing employment — that is, no sales, no job.

Collective bonuses and incentives

If your business performance relies upon teamwork, and your capacity to deliver quality products and services is only as strong as the weakest link, collective incentives and bonus payments are more likely to lead to the performance that you have aimed to achieve. They can also have an impact on the morale of all staff and encourage the better performers to support and lead others in the team to achieve higher levels of performance. One in, all in.

Keeping Pace with Market Rates

The old saying ‘Pay peanuts and you get monkeys’ is not a bad way to introduce this topic. Paying an employee the base minimum wage prescribed in a modern award is the easiest way of managing rewards, and may also be the most affordable method for your business. Nevertheless, in a competitive market for skilled staff you will be certain of only one thing: Your business competitors won’t be paying less (unless doing so illegally!). However, you can’t know for sure how much more they will be paying than you. Consequently, you may find yourself at a competitive disadvantage where attracting and retaining skilled staff is important to business success.

The answer to this dilemma is threefold:

  • Get the base wage right for your business circumstances
  • Understand where you want to compete in the market for staff
  • Know when and how to negotiate wages with staff

Getting the base wage right

The base wage or salary provides the basis upon which all other remuneration is calculated, including overtime, superannuation, penalties and bonuses. This wage should be compliant with the statutory minimum rates as well as sufficient to attract and retain quality staff. You can reference the applicable modern award for the correct minimum base wage.

Competing in the market for wages

Believe it or not, a market exists for skilled and experienced staff that operates independently of the system of statutory of minimum wages and allowances. You need to decide how you intend to compete in this market, and that means deciding the level of base wages and other remuneration you are prepared to pay to attract and retain skilled staff above the statutory minimum.

You can look at three key elements when determining the salary for an employee:

  • Market rates
  • Work value
  • Personal value

The market for wages

Deciding where you wish to pitch your business in the market for salary and wages means working out where you sit in the market. Think of wages as falling within a spread of four quartiles. The first quartile contains the bottom range of salaries for a given job. The second quartile represents wages paid by businesses that are between 25 and 50 per cent of the highest rates. The third and fourth quartiles obviously represent wages that are above the mid-point of the market.

For example, retail shops and supermarket owners in Australia pay an adult shop assistant an hourly wage ranging from the award minimum (approximately $18) to approximately $30. Therefore, the market for wages in the general retail industry is characterised by a spread of $12 with a bottom end of the market at $18 per hour. If we assume that 50 per cent of retail businesses pay their shop assistants $25 or more, any small business that pays less than $25 per hour may not be able to attract or retain shop assistants who are attracted to the higher end of the market.

Most small businesses aren’t able to compete with the larger industry leaders — that is, the big businesses that hold large market share in total business activity for the industry. Therefore, rather than paying the highest wages you may offer a wage at the mid-point. In the preceding example that means $25 per hour. This should ensure that you are at least able to compete against the lower 50 per cent of your competitors to attract and retain staff while maintaining cost competitiveness with your larger competitors that may be paying higher wages.

You can find out what the market is paying by scanning the job advertisements online and in newspapers. You can also contact industry and professional associations to get an idea.

Work value

Australia has a long tradition of differentiating wages on the basis of the inherent value of the work performed. For example, a surgeon is paid more than a hospital orderly. A chef is paid more than a kitchen hand. This is because of the complexity of the work, the required years of education and application of skills and knowledge that aren’t easily replicated by the lesser skilled persons.

However, work value is not always a good indicator of how much salary or wage should be paid to an employee. Although modern award wages are loosely determined on work value, actual wages and salaries are increasingly determined by the fluctuating demands of the Australian economy. A fitter and turner, a boiler maker and truck driver, for example, can all make more money than a university professor by working in the iron ore mines of Western Australia or coal mines of Queensland. Therefore, work value is not necessarily a good indicator of the wages that you should pay to attract and retain good staff. Market rates and personal value may be better indicators in some circumstances, especially where the relation between traditional professionals and occupations has been skewed by market shortages such as in the Australian mining industry.

Personal value

If you find a person who works well for your business, paying a higher wage to retain that person is often a good investment. An employee’s personal attitude, aptitude, loyalty and competence are valuable traits that should be rewarded with a wage or salary commensurate with the person’s value to your business.

Negotiating with unhappy staff

Negotiations for a wage or salary is usually done at the time the offer of employment occurs. In many small businesses negotiations never occur. The wage is the wage and if employees don’t like it then they can resign and/or go elsewhere. This is not an attitude that is likely to engender loyalty from staff.

tip_4c.eps Negotiations don’t need to be formalised affairs with each party sitting on either side of the table with lawyers and union officials fighting it out to extract the best result for their respective clients. I suggest you review the wage or salary package each year on the anniversary of staff employment or coinciding with the adjustments to the NMW and modern award wages.

The factors that you can take into account when negotiating wages and salary are:

  • Changes in the cost of living (consumer price index)
  • How employees values their contribution to the business
  • Movements in market rates of wages — that is, how much your competitors are paying staff
  • Rewards that will motivate better performance
  • The personal value of the employee to the business
  • Any other issues on your mind and the mind of the employee

remember_4c.eps Whatever factors you consider when negotiating wages and salary, keep in mind that you can only pay (above statutory minimum rates) what the business can afford. Do your sums before you commit to any increases and also be creative with your negotiations. You don’t have to just offer wages. Bonuses, incentives and fringe benefits (as discussed earlier in this chapter) may be valued more highly by staff and can be linked to performance more readily than wages or salary.

tip_4c.eps Many negotiators talk about the concept of win—win outcomes. This is important because the employment relationship is not a winner take all relationship. Both you and your employee need to leave any wage review with a sense of mutual satisfaction. As far as possible, you should ensure that your employee is satisfied that you have considered their interests seriously and that the results of the review or negotiations are fair and equitable. A happy employee is more likely to be a productive employee. Good luck!