In the wake of Covid-19, good performance is not always equating to a pay rise. CFOs point to company performance and the economic and political climate as being the main factors behind firms being able to increase their pay budget.
Here we outline guidance for managing the pay budget across organisations amidst ongoing uncertainty.
Finance leaders improvised over 2020 amidst uncertainty and continue to grapple with matching resources with strategy. According to McKinsey’s Memo to the CFO, ‘the budgeting process, with its traditional inputs and standard approaches, is no longer fit for the task’. McKinsey predicts that 65 per cent of CFOs will make more use of rolling forecasts in 2021 and beyond. CFOs are having to continuously balance strategy, value creation and resource allocation.
Crisis response and recovery is critical to budget planning. For example, where retailers had to close to reflect lockdown restrictions, e-commerce platforms will have received increased investment.
Now is the time for companies to be assessing their ‘new normal’ – whether omnichannel marketing strategies have worked or whether they require reorganisation to streamline their business models. Resource budgeting can then be factored into the defined business models organisations will put in place moving forward.
There are variations within sectors in terms of which sectors have fared the best. Whilst grocery shopping has thrived, department stores are struggling, with John Lewis closing more stores. For office-based workers, remote working is no longer viewed as a risk to productivity, and PwC reported in June 2020 that 54 per cent of CFOs planned to make this type of working a permanent option, faced with future waves of the virus.
Minimising talent loss has been a key priority for businesses who have tried to weather the storm of the pandemic.
According to Paydata’s UK Reward Management Survey Autumn 2020, 41 per cent of respondents redeployed employees to other areas of the business to retain talent. 56 per cent have also made use of the Coronavirus Job Retention Scheme. The impact on the workforce has varied widely but many have been intent on reigning in expenses to retain workers. This also supports their employee value proposition, as many employers felt that how they treat employees during difficult times will come to define how they are perceived as an employer in the long-term.
“It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.”
Manage employee expectations
With many employers now rolling out flexible working officially, as a more formal policy, managing performance reviews and line manager relations will be even more important. Open lines of communication across the business are important to support employee morale, regardless of where individuals are based. Paydata’s UK Reward Management Survey highlighted that 14 per cent of respondents planned on reducing the office space they currently hold, whilst 70 per cent will operate a booking system to limit capacity on return to the office – and this was before lockdown 3.0. Ensuring that Line Managers are equipped to manage remotely will be crucial to the effectiveness of performance management – confidence in their communication and the framework they are providing to their employees is key.
We believe Line Managers are the gateway between strategy plans and strategy in action. Line managers are crucial to whether performance management conversations are effectively held and the extent to which they support the wider organisation’s strategy. Regular performance review conversations every three to six months can help manage employee expectations around the pay awards available to them this year.
Constrained pay budgets
If some organisations face tight pay constraints, will performance reviews have to be completely reimagined in light of Covid-19? This time last year, as the UK entered its first national lockdown in March 2020, 56 per cent of respondent employers to our Reward Management Survey had already made their pay and reward decisions. Going forward, to make the best use of pay increases, companies will have to consider how they reward performance and recognise key individuals that are critical to their success. The pandemic may have distorted typical budget baselines, with some suggesting using a zero-based budgeting system to manage tight budgets. This means that CFOs start without pre-defined budgets based on activity pre-pandemic; they build their budgets based on business need to determine key business drivers, which could cover targeting pay.
Areas of difficulty for recruitment and retention
Only one third of respondents to Paydata’s autumn UK Reward Management Survey operated an across the board increase in their 2020 pay review. 16 per cent operated individually determined increases, whilst 25 per cent followed a combination of individually and group determined increases. Individually determined increases enable organisations to target high performers and areas of top talent or high turnover in the business. Targeting pay in this way can make efficient use of the available pay budget for the year, in the wake of the economy contracting by 9.9 per cent due to the pandemic.
Factor in the National Living Wage
The National Living Wage further complicates pay budgeting for the year. The government accepted the recommendation from the Low Pay Commission to raise the level by 2.2 per cent to £8.91 an hour. Whilst this mandates salary increases for the lowest paid in the business, in reality this creates an upward pressure on pay for those in higher salary scales too. Pay equity needs to be upheld, resulting in companies having to ensure the salary scales are adequately adjusted across the board to reflect additional responsibilities and avoid compression with other bands.
Some companies have not focused on performance management over the period of the pandemic. In between implementing furlough schemes and diversifying to minimise the impact of restrictions on companies’ operations, any incremental pay increases are being driven by affordability. Pressure is growing on the government to increase their recommended one per cent pay rise promised to NHS workers, based on arguments over what they could feasibly afford. The backlash continues to grow – with 40,000 nursing vacancies in the NHS in England, competitive pay is important to bolster recruitment and retention in the profession.
Redefining the process
Performance management in itself can vary in quality. Often backward-looking documents are obtained for individuals to make the case for greater pay and reward, when analysis should focus on where individuals should concentrate their efforts next and feedback should be more frequently accessed. This is in step with keeping a company agile in their approach. Clear objectives that guide future performance are crucial to defining future pay.
The key element of a strong performance management system is the level of transparency around the process.
To maintain employee engagement, expectations around each role and the remuneration package available is important. Further training and objectives need to be agreed that factor into future performance reviews, with clear career paths helping individuals understand exactly how to progress. This evolves salary reviews into performance reviews, which provide employees with a longer-term vision for their role in the company.
Virtualise your organisation
Supporting software is crucial to actively and effectively manage pay increases – demonstrating the power of tools that can align HR and Finance with the overall business objectives of an organisation. Deloitte outlined the importance of organisations being ready to respond to rapid changes posed by the pandemic in its CFO Insights. PayReview can help to easily manage the vast process of defining pay budgets across an organisation.
The software can be tailored to customer’s bespoke requirements. For instance, the software could define a budget and give managers’ discretion to make their own decision around the appropriate level of pay increase that they award their team. By defining the parameters for success based on the organisation’s culture and ways of working, PayReview is an intuitive pay and reward system that makes a matrix of different pay decisions simple to manage.
Find out about PayReview today
Using software to intuitively manage data is essential to optimise your pay review. PayReview is designed to be easy to use across organisations and can be implemented to accommodate your specific requirements. Our software can enhance people’s lives at work. Now more than ever, companies need to be embracing tools that enable the ‘new normal’ well beyond 2021. Contact us today to arrange your free demonstration of what PayReview can do for you.
Founder of Paydata
Paul has led the reward consulting services at Paydata over 20 years, advising FTSE 100/250, private equity and other UK businesses.