Remuneration decisions are made under pressure — a resignation threat, a hiring gap, a good year — and rarely designed. The result is pay structures that reward things nobody intended and create expectations that are difficult to unwind.
Fixed pay
Base salary or wages should be defensible on internal consistency and external market.
Internal consistency matters more than most employers expect. People discuss pay, and unexplainable differences between comparable roles do more damage than the absolute level. If you cannot explain why two people in similar roles are paid differently, that is a problem waiting to surface.
External market data comes from industry surveys, recruiters and job advertisements. Be realistic about the market you actually compete in — for many roles that now includes remote employers in Australia and offshore.
The full cost of employment
Budget on total cost, not the wage. Add ACC levies, KiwiSaver employer contributions — currently 3.5 percent, rising to 4 percent on 1 April 2028 — holiday pay, sick leave, public holidays, training and equipment.
The gap between wage and true cost is substantial, and businesses that price their services on wages alone under-recover systematically.
Variable pay: get the measure right or do not use it
Incentives work. That is the problem — they change behaviour toward whatever is measured, including at the expense of things that are not.
Common failure modes:
- Sales commission on revenue rather than margin, which encourages discounting. If salespeople can discount, commission should be on gross profit.
- Production or delivery incentives that compete with safe work. Payment structures rewarding distance, piece rate or delivery count create pressure toward non-compliance and are examined after a serious incident.
- Individual targets in work that requires cooperation, which reliably reduces cooperation.
- Targets set so high they are unreachable, which demotivates rather than drives.
- Discretionary bonuses paid every year, which become an expectation and lose all incentive effect while retaining the cost.
Before implementing any incentive, ask: what would someone do to maximise this payment, and would we be happy about it?
Document what is discretionary
If a bonus is genuinely discretionary, say so in writing and exercise the discretion genuinely. A “discretionary” bonus paid at the same level every year for five years may well have become a contractual expectation, and removing it becomes a change to terms requiring agreement.
Where a bonus is contractual, be precise: what triggers it, how it is calculated, when it is paid, and what happens if someone leaves during the period.
The leave interaction
Bonuses and commission generally form part of gross earnings for holiday pay purposes. Employers who exclude them from leave calculations underpay, and this is one of the largest sources of remediation liability in New Zealand payroll.
Confirm how your payroll system treats each pay component. This is a configuration question that produces consistent errors when set up wrong.
Non-cash and total reward
Where you cannot compete on salary, other things carry genuine weight: flexibility and remote options, additional leave, professional development and registration support, health insurance, and predictable rosters in industries where they are rare.
Note the fringe benefit tax consequences of non-cash benefits. A vehicle available for private use triggers FBT unless the work-related vehicle exemption conditions are all met — permanent signwriting, written prohibition on private use, and quarterly checks that are actually done and recorded.
Equity and share schemes
Employee share schemes can align people with the business and are common in technology firms. They carry tax consequences for employees, valuation questions, and complexity on exit that should be addressed before offering them.
For a small private company, be honest with employees about liquidity — shares with no market and no dividend policy are worth less to them than the paperwork implies.
Review deliberately
Annual reviews at a consistent time are better than ad hoc adjustments in response to resignation threats, which reward the wrong behaviour and are noticed by everyone who did not threaten to leave.
Employment New Zealand publishes guidance on pay and wage records, and Inland Revenue publishes material on FBT and employee share schemes.
General information only, not legal or tax advice.
