KiwiRail will increase pay for 2,319 Rail and Maritime Transport Union members by the same amount, meaning the lowest paid get the biggest increase.
The agreement was reached within a day of negotiations and comes after three years of improving staff engagement turned positive.
The two-year deal is effective from July 1, KiwiRail said. The state-owned enterprise has said its work with the union has been key to lifting the level of engagement, and again cited it when announcing the pay hike.
"KiwiRail and the RMTU have worked closely together over the past three years on a High Performance, High Engagement (HPHE) programme which brings management and workers together to develop frontline solutions to business issues," chief executive Peter Reidy said in a statement.
"I commend the RMTU for initiating this innovative solution which is not only fair but will help those who need it most."
The rail operator last week reported a decline in earnings before interest, tax, depreciation and amortisation due to $45 million of added costs from the Kaikoura earthquake.
Stripping that out, underlying earnings edged up with a small gain in revenue.
KiwiRail employs more than 3,500 across the country and plans to keep working with unions to lift productivity.
Over the next 12 months, it has projects aimed at addressing "train optimisation" and will introduce "mechanical workforce development", its statement of corporate intent said.
The second stage of the HPHE programme, intended to "equip managers with the skills required to implement site-specific processes that will further boost productivity and safety", will also be rolled out.
RMTU general secretary Wayne Butson said the pay increase was supported by KiwiRail, which will pay the two-year increase upfront, lifting wages for those at the bottom of the pay scale by 6.9 percent.
Butson said the union's members found the HPHE process "encouraging and energising" in that KiwiRail management took suggestions seriously.
"It is with huge relief that we reported to our members that the system they are now using regularly in their workplace was the basis for a fair pay deal which starts to narrow the gap between the low and well paid," Butson said.
KiwiRail, Air New Zealand, New Zealand Post, the district health boards, and the Department of Conservation have been at the forefront of the HPHE programme.
The approach was a topic at the government's first tripartite 'Future of Work' forum earlier this month. The government is considering how it can support employers and unions to implement the programme to support increased productivity