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We examine how the economy is shaping up for 2020 and the backdrop against which pay operates that is set to determine pay practices in the year ahead.

Following the recent publication of the CIPD’s Reward Management Report, we outline the key priorities to factor in when it comes to the pay review process.

Global political and trade tensions

There has been substantial movement on what Brexit will look like following the majority government the Conservatives now command and the government set to try to secure trade deals by 31st December 2020. Paydata’s UK Reward Management Survey results in autumn 2019 highlighted the effect of prolonged uncertainty surrounding Brexit on businesses, with only 31 per cent of businesses expecting their revenues to increase, in contrast to 60 per cent in spring 2018. With only half of the respondents to the survey having a post-Brexit plan in place, the deal is expected to become law within days so businesses can start planning with more certainty.

“Some will benefit, some won’t”

In the words of the Chancellor over the weekend, Mr Javid acknowledged that not all businesses will benefit from Brexit. The Food and Drink Federation has warned that food prices will rise at the end of the transition period without the current “frictionless trade” enjoyed by the industry. Moving away from EU regulations as they stand is anticipated to impact the manufacturing sector, particularly the automotive and pharmaceutical industries. The Confederation of British Industry has said whilst they welcomed Sajid Javid’s “ambitious” vision, the government should not feel they have an “obligation” to change EU rules. By keeping some degree of continuity with the same regulations where possible, jobs and competitiveness can be supported with limited disruption.

Vision for growth

Growth plans set out by the Chancellor are indeed ambitious – committing to double the UK’s annual economic growth to between 2.7 and 2.8 per cent. This is in contrast to the outgoing governor of the Bank of England’s assessment that the growth projections are set to be much lower, between 1 and 1.5 per cent. The possibility of a weakened global economy in the short term, that is set for a recession as part of a wider economic cycle either this year or next year, looms in the background of these discussions, which is further exacerbated by political tensions in relation to Iran driving up oil prices and reports that incremental progress is being made in relation to the China/US trade war. These uncertainties may fuel constrained growth and impact business activity over 2020.

Impact on pay

Gaining the skillset and knowledge to withstand wider economic uncertainty and strengthen each business is vital for an organisation’s long-term success. Pay is a crucial tool in attracting and retaining the right talent. Sophisticated skills will drive growth both within the UK and on a global platform, so competitive pay is a central consideration in effective recruitment and retention strategies, pivotal in looking after one of the most important facets of any organisation – its people.

How macro trends will shape pay

The two most quoted drivers for pay increases are external relativities and targeting high performing individuals – putting a firm focus on recruiting and retaining the right talent through competitive reward packages.

Organisations believe that Brexit will have the biggest impact on skills and labour shortages, with 33 per cent saying shortages will increase as a result of Brexit and 36 per cent saying it is too early to tell. In contrast to the half of organisations saying that investment in other HR/Reward operations (pay review funding, project budgets and the employment of young people) will remain the same, areas designed to tackle recruitment and retention are a key investment area.

Pay as a recruitment tool

Loyalty no longer translates to automatically higher pay, with two thirds of organisations having to offer new recruits salaries that conflict with those paid to existing employees. People are paying more for key skills, but keeping levels consistent and ensuring there is parity of pay will future-proof pay arrangements to ensure that fair pay is upheld. The CIPD’s Reward Management Report outlined the changing role of pay from being a primary motivator in employee engagement to a multi-faceted tool that has to withstand public scrutiny and factor into PR plans. Responsible levels of pay are increasingly sought. The rigour of pay systems can lay the foundations of equality and engagement throughout organisations.

Pay predictions for 2020

Up to three per cent pay increases remains the most popular amongst respondents to our Reward Management Survey for 2020, sustaining wage growth as this tracks inflation.  However, this varies from sector to sector and it is important to obtain market data that is not always in the public domain in order to accurately benchmark salaries of similar organisations. Whilst it is important to factor in market data from the sectors in which an organisation operates, wider market information should also be reviewed to ensure that pay is competitive across a range of sectors for roles that involve transferrable skills. The average pay over the past five years has gradually increased from two to three percent, but uncertainty around Brexit has led to constrained growth especially at the top end of pay budgets, with increases above 3.5 per cent rarely being granted.

Skills shortages

The war for talent and particular skills also creates pressure on pay budgets. Higher increases are more common in the care, construction and house building sectors. Over half (55 per cent) of respondents in our UK Reward Survey had experienced difficulty in retaining people and anticipate ongoing difficulties. However, more respondents revealed difficulties with recruiting people over the past 12 months, with 66 per cent facing challenges and 60 per cent expecting these difficulties to persist. The national living wage is also requiring employers to differentiate roles more. With greater levels of pay required for roles with less responsibility than middle managers for instance, this drives up pay budgets across the business, which needs to be carefully balanced with recruitment and retention difficulties.

Are pay predictions being skewed?

With increasing pressures on pay to accommodate increasing inflation rates and the national living wage, and maintain meaningful differentiation between salary levels within organisations, we continue to monitor the role of out of cycle pay increases. 75 per cent cite market pressures as a key driving force behind their use. These types of increases may be supplementing organisations’ reports of steady pay awards, operating to bridge the gap between official pay review figures and wider market pressures. They most commonly account for up to one per cent of annual pay bills. 71 per cent anticipate that market pressures will continue to drive these types of increases in 2020. Internal pay alignment is the second biggest driver, with nearly half of respondents citing this as the reason behind out of cycle awards granted in both 2019 and 2020.

Transparency and fairness needs a framework

Pay decisions require a robust framework to ensure increases are consistent and fairly set across organisations. There are many different types of pay structure that enable consistency and fairness to be embedded into the culture, so that transparency around the process can be achieved. According to CIPD’s Reward Management Report, only half of employers communicate how pay increases are decided, how pay structures work and what staff need to do to receive a pay rise. Employee perceptions of pay fairness need to be improved. Line managers are fundamental in the effectiveness of performance management and the resultant pay decisions being made within a business. With more external measures to regulate pay and ensure objectively verifiable systems are in operation within organisations, there has never been a clearer business case for reviewing your business’ approach to pay.

We would be delighted to talk to you about how to maximise productivity whilst ensuring that your employees feel valued for their contribution. Get in touch to discuss how we can help to review your organisational design.

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