Navigating Salary Reviews and Budgets in 2025 : Advice for NZ Employers

Employer Advice Human Resources

As we move through the second half of 2025, New Zealand businesses are still grappling with how to balance employee expectations against financial realities, especially as many head into salary review season. What was once a simple annual exercise has become far more complex, with inflationary pressures, skill shortages, and shifting employee priorities shaping an increasingly competitive employment market. We know employers are juggling tight budgets with the need to engage and retain their people; trying to offer enough to keep teams motivated without overspending. Those who take a strategic approach to salary reviews, and look at the bigger picture of workforce planning, will be best placed to retain talent, manage costs, and strengthen their employer brand.

To help, here is our advice for getting it right for both your team and your business:

1) Obligation vs choice:
Salary reviews are not mandatory and can be at your discretion as an employer; however, check your employment agreements to make sure you are fulfilling your contractual obligations and any agreed review processes. Employees can ask for a pay raise, and you should consider and respond fairly, but you don’t legally have to grant one. However, having no salary reviews plans in place can seriously affect the engagement, morale and retention of your employee’s. In a tough economic environment, employees are unlikely to be satisfied with their salary staying the same, especially whilst inflation and the cost-of-living continues to bite. Keep in mind that you could end up spending more than you have saved, to replace those same employees if they were to leave.

2) Plan early with clear budget forecasting and alignment to business goals:
Salary reviews shouldn’t be a last-minute decision. Start planning at least 3–6 months in advance. Before salary discussions begin, ensure your financial forecasting is robust. Factor in not only inflation and operational costs, but also industry benchmarks and economic projections. Align your salary review process with your broader business priorities; whether that’s growth, stability, or transformation. Consider how pay increases will impact not only your bottom line but also your ability to retain key talent and maintain morale. Build flexibility into your salary review budget so you can address high performers or hard-to-fill roles also.

3. Use market data, but so be realistic and use common sense
Market salary data is key to remain competitive, but it’s just one part of the picture. Use reliable salary surveys and benchmarking tools to stay competitive, especially in high-demand roles. But also recognise when internal equity, retention value, or employee growth justify an above-market decision. It is also important to be mindful of pay compression (this is where new employees are offered more than existing employees) and take planned steps to manage discrepancies over time.

3) Communication and be transparent with your staff:
Employees value honesty and consistency. One of the biggest frustrations for employees is lack of clarity around salary decisions. Clearly outline the criteria for your pay reviews, how the process works, and what factors influence individual outcomes (e.g. performance, role scope, external benchmarks). If your business cannot offer increases this year due to budget limitations, explain the rationale clearly. Transparency builds trust and encourages retention.

4) Consider adopting different approaches:
Consider differentiated approaches to salary reviews which rewards high performance and future potential. Blanket percentage increases are becoming less effective, so perhaps you could explore a ‘Performance and Potential-Based’ approach. This is where you align salary increases with employee contribution, criticality of role, and retention risk. Using performance data and one-on-one feedback loops to inform your decisions.

You could also consider enhancements to non-monetary benefits, and offering a ‘Total Rewards’ perspective. Some of these benefits could include additional leave or wellness days, training budgets or education allowances, flexible hours or remote working options, health and wellbeing programmes etc. Tailor your offering based on what your people actually value. It is a good idea to survey your team and give them a voice. This will help you prioritise the benefits that make the biggest difference.

5) Empower your people leaders:
Salary discussions are personal and often emotional. Ensure your managers are well-equipped to handle salary conversations with empathy and consistency. Provide them with guidance on your review process, the rationale behind budget decisions, and tips for delivering both positive and difficult news. Train your leaders to listen actively, how to deliver the messaging/explain outcomes and discuss development paths where increases aren’t possible right now. Consistent messaging across your teams is critical to avoid confusion, build long-term engagement and reduce turnover; even when financial rewards are limited.

6) Remember to look beyond the numbers
One of the key messages for you; salary reviews are not just about the dollars. They are about recognition, engagement, and future alignment. If you invest in building a supportive, communicative culture, we guarantee you will retain top talent and weather financial constraints, better than those who rely on pay alone.