Cost of living | Managing pay rise pressure as an employer
Written on 17 February 2021
Latest ONS data shows that the cost of living is continuing to outpace wage growth. As a result, along with widening skills gaps and a mass exodus of talent, UK employers now have the spectre of rapidly increasing wage demands to contend with.
Salary reviews were largely put on hold during the turbulent pandemic era, but with UK inflation hitting a new 30-year high of 5.5%, businesses have since been forced to rethink, as staff turn to their employer to bridge the gap in their finances.
Unfortunately for both businesses and their employees, this is a crisis that is expected to worsen still, with the Bank of England expecting the rate to reach as high as 7% in the spring.
With pressure mounting and resources tight, this is a scenario with the potential to become particularly divisive in many organisations in the months ahead. Employers must therefore take this opportunity to equip leaders with the tools to navigate this situation in a healthy and effective manner.
The tricky labour market
When faced with pay rise pressure, employers often ask themselves, ‘can I afford to?’ Perhaps instead, the more pertinent question to ask is whether you can afford not to.
It has been well-documented in recent months that employees all over the world are leaving their posts in droves. In fact, one survey of 6,000 UK workers found that 69% were confident about moving to a new role within the next few months, with nearly one-quarter saying they were planning a change within three to six months.
To make matters worse, this is converging with what is arguably the most competitive labour market the UK has ever seen. CIPD research, for instance, found that four in 10 (39%) employers currently have ‘hard-to-fill’ vacancies.
With these factors in mind, it’s fair to say that today’s employee has more bargaining power than ever before – a critical factor when it comes to handling pay rise pressure.
Already, Marks and Spencer has announced that it will increase minimum pay by more than 5% to £10 an hour and offer free health checks to workers as labour shortages force wages up across the retail and hospitality industries.
It is of course tempting to perceive a pay rise as an overhead increase, but with Glassdoor research suggesting that turnover costs £11,000 per employee on average, refusing to even consider raising wages may prove more expensive in the long run.
Naturally, the consequence may be a loss of top talent, combined with significant costs incurred through recruitment processes, decreased productivity and the negative impact on employee morale.
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Possible alternatives to pay rises
Invariably, many employers will be keen to resist the ensuing pressure from their workforce amid tough economic conditions. They must, however, be equipped with alternative measures. For instance, you may feel more able to consider whether you can offer further financial support to individuals through your broader benefits offering.
Flexibility here is key, and it falls to HR and people management teams to help companies understand whether there is scope to offer things like interest-free loans for buying travel season tickets, or childcare vouchers for tax savings through salary sacrifice schemes.
Employee Assistance Programmes (EAPs) may be another worthwhile investment for businesses, giving employees access to support in areas such as mortgage advice, financial planning and debt management, as well as with other non-financial issues. Many EAPs will even supply counselling to help employees manage the emotional challenges that often accompany financial difficulty.
There may also be schemes that already exist within the business which employees don’t know about. HR has an important role here in communicating what is available and encouraging maximum uptake.
In making these efforts in the modern age, an increasingly popular approach is to become more data-driven as an organisation. This way, you can offer employees a package that matches their needs but also those of the business.
And despite the inherently financial nature of the current cost of living crisis, it could even be worth thinking beyond this realm in some cases. For instance, you may find that some employees would be willing to forego a pay rise in lieu of a more structured and advanced personal development plan, or a healthier work-life balance.
Initiatives such as these can have a profound effect when it comes to retention efforts. In a 2018 study, for instance, 92% of employees said that they feel benefits have an impact on their overall job satisfaction. In the current UK labour market, this could be critical to organisational health.
Normalising pay-related conversations
Finally, the cost of living crisis arguably presents employers with a golden opportunity to address a critical but often overlooked cultural tenet – the level of transparency within an organisation when it comes to financial matters.
On the most basic level, this openness can be exercised during the pay review process. Yearly pay reviews are recommended, unless your business operates performance-related pay, in which case individual objectives can be linked directly to business performance.
Even if the review doesn’t lead to a pay rise, it’s vital to demonstrate that a certain degree of thought and communication has gone into looking at salaries and considering whether one could be applied.
At this stage, the employer can then take the opportunity to lay out a set of goals and KPIs for the individual to work towards. This will give them a greater sense of visibility and control over salary progress, and will quite possibly keep them engaged as a result.
But these conversations should not be taking place merely as a reaction to the current climate; rather, the organisation must seek to normalise this type of open dialogue. To this end, the CIPD recommends that organisations put in place a financial wellbeing policy, which they discuss openly and regularly with their workforce.
“It’s important for business leaders to encourage open discussion about financial issues by normalising conversations about money. For example, by talking openly about the money worries they have confronted or even the organisation’s financial situation more generally”, it said during 2021’s Talk Money Week.
“To help reduce stigma and make employees more likely to access help when they need it, HR teams can also use communication channels and encourage people managers to signpost employees to sources of financial wellbeing. Involving employees in the development of your financial wellbeing strategy can also help break down barriers.”
Indeed, working with HR is paramount when it comes to navigating wage discussions, as companies must not fall into a trap of offering pay rises based on individual needs – as might be the temptation right now given people’s differing circumstances and struggles. Instead, there should be clear structure surrounding pay and promotion.
Specialist support with pay and rewards
Pay is one of the most common causes of employer-employee disputes. With relationships between organisations and their workforces already fraught as a result of the pandemic, it’s important to get it right, and to take swift action when a complaint arises.
From advice on navigating pay-related conversations to hands-on help producing policies and conducting pay benchmarking exercises, WorkNest’s qualified Employment Law and HR specialists are on hand to help you minimise issues, retain your workforce, and set salaries that are fair, motivating and viable for your business.
For support, call 0345 226 8393 or request your free consultation using the button below.