Few decisions placed before a board carry consequences as far-reaching as the approval of company-wide salary adjustments. Unlike many other expenditures that can be reduced, postponed, or eliminated as circumstances change, salary increases create recurring obligations that become embedded in the organisation’s cost structure.
Once implemented, employees quickly adjust their expectations and view the new salary levels as their rightful earnings. Any future attempt to reverse those increases can create contractual complications, significant employee relations challenges and damage trust between management and staff. For this reason, boards must approach salary adjustment decisions with a level of rigour, discipline, and independence that matches the importance of the decision being made.
Many salary adjustment proposals arrive before boards, accompanied by persuasive arguments. Management may cite inflation, rising cost of living, retention challenges, recruitment difficulties, or concerns about employee morale.
While these factors may be legitimate considerations, they do not automatically justify an increase in the wage bill. The board’s responsibility is fundamentally different from management’s. Management is responsible for running the organisation and addressing operational issues, while the board is responsible for ensuring that decisions made today do not undermine the business’ long-term sustainability.
A board that simply endorses every salary adjustment proposal without rigorous examination is failing in one of its most important governance responsibilities.
One of the biggest mistakes boards make is viewing salary adjustments as a human resources issue rather than a strategic business issue. Every increase in salaries has implications that extend well beyond employee compensation.
Salary adjustments influence pension obligations, bonus calculations, leave liabilities, gratuity payments, medical aid contributions and several other employment-related costs. In many organisations, employment costs already represent one of the largest expense categories on the income statement.
A seemingly modest salary increase can therefore translate into a substantial increase in total operating costs. Boards must therefore evaluate salary adjustment proposals in the same way they would assess any major financial commitment requiring long-term funding.
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An important question that every board should ask is whether the proposed adjustment is sustainable. Sustainability is often overlooked in remuneration discussions, as attention tends to focus on immediate pressures rather than future consequences.
A salary increase that appears affordable today may become a serious burden if revenues fail to grow as anticipated or if economic conditions deteriorate. Boards should therefore assess proposed adjustments against realistic revenue projections, expected profitability, cash flow forecasts and the broader economic environment.
The central issue is not whether the organisation can afford the increase this year, but whether it can comfortably sustain the increased wage bill several years into the future.
One of the most valuable tools available to boards when assessing salary adjustment proposals is market benchmarking. Organisations compete for talent in labour markets and remuneration decisions should be informed by what comparable employers are paying.
However, market data must be credible, current and relevant to the organisation’s circumstances. The objective is not to blindly follow the market or to match every salary movement occurring elsewhere.
Rather, the purpose is to understand where the organisation stands relative to competitors for talent and whether adjustments are justified by external market realities. Boards that make remuneration decisions without reliable market intelligence are effectively making decisions without understanding the environment in which they operate.
The issue of market positioning is often misunderstood. Some organisations assume that paying above market automatically makes them an employer of choice, while others believe that paying below market helps control costs. Both approaches can create significant problems if they are not supported by a broader remuneration strategy.
Paying substantially below market can increase turnover, create recruitment difficulties and damage employee engagement. Paying substantially above market can place unnecessary pressure on profitability and reduce organisational competitiveness.
The board’s responsibility is to ensure that remuneration levels are aligned with a deliberate and sustainable strategy rather than emotional reactions or short-term pressures.
Another reality boards must never ignore is that management is not a neutral party when salary adjustment proposals are under consideration. In many cases, the same executives who prepare the analysis, formulate the recommendations and present the proposals are also beneficiaries of the proposed adjustments. This does not imply misconduct or bad faith on the part of management. It simply reflects the reality that management has a direct interest in remuneration outcomes.
Good governance requires boards to acknowledge this reality and ensure that remuneration decisions are not based solely on information produced by interested parties.
For this reason, the HR or remuneration committee must ensure that any data used to justify salary adjustments has been independently verified. Boards should be cautious about relying exclusively on management-generated analyses, particularly when those analyses form the primary basis for significant increases in employment costs.
Independent salary surveys, external remuneration consultants, benchmarking studies, and third-party market data can provide valuable objectivity. The purpose of independent verification is not to challenge management unnecessarily but to ensure that decisions are based on reliable evidence.
Strong boards understand that independent verification protects the interests of shareholders, employees and the organisation itself. Independent verification becomes even more important when organisations are experiencing financial pressure. During difficult periods, management may feel compelled to recommend salary adjustments to address morale concerns or labour relations pressures.
While these concerns are important, boards must remain focused on the long-term viability of the organisation. An unsustainable salary increase can ultimately harm employees if it contributes to financial distress, restructuring, or job losses. Governance requires the ability to distinguish between decisions that are popular and decisions that are prudent. The best boards understand that these are not always the same thing.
Affordability should always be at the centre of remuneration decision-making. Employees naturally desire higher salaries and management may legitimately advocate for improved remuneration.
However, the board’s role is not to determine what employees would like to receive. Its role is to determine what the organisation can sustainably afford while continuing to invest, grow and remain competitive.
A remuneration decision that weakens the organisation’s financial position ultimately benefits no one. Boards must therefore insist on clear evidence demonstrating that proposed salary adjustments can be supported by the organisation’s financial realities rather than optimistic assumptions.
Another factor that deserves careful consideration is productivity. Salary growth that consistently exceeds productivity growth creates significant long-term challenges for organisations. When employment costs rise faster than the value generated by employees, margins come under pressure and competitiveness suffers.
Boards should therefore seek to understand whether proposed salary adjustments are supported by improvements in productivity, operational performance, customer outcomes, or other measures of organisational success.
While remuneration decisions should not be reduced to simplistic formulas, there should be a reasonable connection between what employees receive and the value created by the organisation. Sustainable remuneration systems are built on this principle.
Boards should also remember that salary adjustments send important signals throughout the organisation. Employees pay close attention to remuneration decisions and often interpret them as indicators of organisational priorities and financial health.
A well-justified and carefully communicated adjustment can strengthen confidence and trust. Conversely, poorly justified decisions can create unrealistic expectations and make future remuneration discussions more difficult. This is why boards should not only focus on the decision itself, but also on the rationale supporting it. Transparency and consistency are critical elements of effective remuneration governance.
Ultimately, salary adjustment decisions are governance decisions before they are HR decisions. They require boards to balance employee expectations, market realities, financial sustainability, productivity considerations and long-term organisational performance.
The board’s duty is not to maximise salaries, nor is it to minimise them. Its duty is to ensure that remuneration decisions support the long-term success of the organisation while remaining fair and competitive. This responsibility requires independence, discipline, and the courage to ask difficult questions when necessary.
The strongest boards understand that every salary adjustment proposal should be subjected to rigorous scrutiny before approval. They insist on credible market data, independently verified evidence, realistic affordability assessments and a clear understanding of the long-term consequences of the decision. They recognise that management recommendations, while important, should never replace independent judgment.
Most importantly, they understand that remuneration is not merely a cost issue but a strategic issue with profound implications for organisational sustainability. A board that consistently applies these principles is far less likely to approve salary decisions that it will later regret.
Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and HR consulting firm. — https://www.linkedin.com/in/memorynguwi/ Phone +263 24 248 1 946-48/ or e-mail: [email protected] or visit ipcconsultants.com.
