Is retention the new pay increase?

Following a sharp deceleration in pay growth and a moderate rise in headcount in September, an emerging small-business phenomenon is showing how employers are reacting to tight operating margins.

Changes to wage growth and headcounts are signalling wider changes within the labour market, with small-business employers considering other means of protecting themselves from financial pressures.

According to the latest data from Employment Hero’s Jobs Report, a nine-month cooling to annual wages has now seen a more dramatic decline, falling from 4.5 per cent year on year (YOY) in August to 2.2 per cent YOY in September.

At the same time, headcount saw a 0.8 per cent increase from August – the highest single-month increase since May.

HR Leader spoke to Employment Hero APAC managing director James Keene to examine this apparent economic trade-off whereby small-business owners are supporting staff via job security over pay rises, and recruiting more deliberately.

Keene identified a mutual agreement where “job security and workforce stability have become the primary currency between SMB employers and employees”.

He said: “Workload pressure is a very real, everyday constraint for Australian businesses right now … when salary budgets are tight, preserving workforce sustainability comes down to managing capacity and enhancing the non-monetary elements of your employee value proposition. That means offering genuine flexibility, clear internal career pathways and practice wellbeing support.”

Keene noted that a partial driver of the dramatic wage growth decrease can be connected to new starters joining at average lower salaries, rather than cuts to existing employees – while also acknowledging that small-business owners do not have the headroom to keep expanding payroll at previous rates.

This would align with data that found the casual employment of 18- to 24-year-olds and the addition of more junior, part-time or entry-level employees.

“For small businesses, young hires are a growing source of capacity, but their cost advantage is narrowing,” Keene said.

“Our dataset shows that young workers are being steadily absorbed into SMBs, even against a broader macroeconomic backdrop where national ABS youth unemployment has hovered around 10-11 per cent throughout 2026. For small-business leaders, under-25s remain a vital growth engine, offering an effective way to balance talent acquisition with cost management.”

In what could be another wave of job-hugging – whereby employees stay in unfulfilling or unhappy positions for the sake of financial or job security – Keene said it isn’t yet clear whether workers are choosing stability or simply don’t have any other choice.

He said the distinction matters for HR managers.

According to Keene, “if movement is constrained, retention depends on whether people feel secure where they are; if it’s a choice, culture and communication carry more weight. Pay still matters, particularly where wage pressure is strong, so retention plans should treat pay as one lever alongside job security and culture rather than an afterthought.”

He noted that small businesses are using AI and automation as an “operational force multiplier rather than a headcount reduction tool”, whereby technology can take the administrative weight off small teams, allowing them to accomplish high-value work without driving up overheads or burnout.

“Managing workload sustainability requires giving teams better tools rather than expecting them to simply do more,” Keene said.

“Forward-thinking SMBs are taking administrative friction off their people by leveraging HR automation and smart tech. By removing manual, repetitive tasks, businesses enable employees to accomplish more in their day without driving up burnout or overstretching capacity.”

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