Planning pay reviews amidst economic uncertainty

As 2020 drew to a close, many employers were hopeful that they had secured a steady revenue and income pipeline for the year ahead that would ring-fence pay awards. Our UK Reward Management Survey reflected lower expectations around revenue and profit. People were realistic not to expect things to ramp up even though we hoped for more normality.

As uncertainty and restrictions persist, we outline how employers can weather the storm of financial planning when it comes to their 2021 pay reviews.

Roadmap out of lockdown

During the second lockdown, employers were reporting that the effect of the restrictions over 2020 meant they were anticipating it would take two years to recover to pre-pandemic levels of profitability. Anecdotally in our HR groups, employers were anticipating that revenue levels will not recover until 2022.

Hopes are firmly pinned on the race against the virus to vaccinate everyone quickly enough to guard against the more transmissible strains becoming dominant. The International Monetary Fund forecasts that the US and Japan will not return to growth levels seen before the second half of this year and the UK and EU not reaching that point until well into 2022.

Impact on pay reviews

This directly impacts assessments of pay levels for the year ahead, in addition to pay structure queries. Many businesses took the second lockdown in autumn 2020 as an opportunity to assess their plans for 2021, considering whether they were match fit as an organisation and whether recovery could be streamlined and faster than anticipated.

We have seen an increase in pay structure queries as companies step back to look at the bigger picture. In some cases, this is driven by affordability, but there has been more of a wider focus on assessing the organisation’s agility and how they can best pick things back up again. There is more urgency now to assess the shape of organisations and whether they are as efficient as possible to jump-start their recovery.

Economic recovery

The Bank of England (BoE) expects that the economy will shrink early this year before recovery takes hold during 2021. The Bank has left its interest rates at their record low-level of 0.1 per cent and forecasts a 4.2 per cent slump in GDP during the first quarter, followed by a resurgence of economic activity buoyed by the vaccination programme. The BoE predicts that GDP will return to levels seen before the pandemic by March 2022. Lenders are being told to prepare for negative rates in July as a contingency plan.

The UK economy is also grappling with the implications of Brexit adding levels of bureaucracy. Industries are requiring further support on top of the COVID bill, particularly in relation to the farming industry, which used to benefit from the subsidiaries formerly received under the EU’s common agricultural policy, providing £3bn across the UK, and  fishing industry. On the other hand, it is projected that some sectors will benefit from a greater global platform, particularly for the financial sector with a focus on New York and Singapore, according to the head of Barclays bank and will fare better overall in the long-term.

How to deal with economic uncertainty when setting pay levels

For the levels of pay reported by employers in 2020, these awards had largely been agreed and implemented before Covid-19 restrictions took hold. Where they had not proceeded as planned, pay freezes were prevalent for 12 per cent of respondents to our UK Reward Management Survey. Constrained pay will continue to be prevalent amidst economic uncertainty. Many employers are seeking accurate benchmarking pay data despite these salary freezes, which is tied to skills shortages. The concern is that people will move on if pay and reward schemes lag behind as it remains an employee’s market for those with highly sought-after skills.

Employers are also very aware of the challenges around employee engagement right now. The longer the restrictions go on, the greater the risk of employee burnout. The way employees feel they are treated by their employer at the moment goes a long way to how they perceive the employer. Factoring in whether they are paying competitively will be important to maintaining employee morale, shifting the focus onto heightened communication and other employee benefits, especially taking into account employee isolation that has grown over time for remote workers.

Additional considerations to factor into pay reviews

1. Pay equality – employers are under greater scrutiny to pay relatively and fairly across their organisation. After the government tried to ease administrative burdens facing companies for the year by disregarding the duty to publish gender pay gaps, a greater focus on gender and equal pay is anticipated after employers resume publishing figures annually. There is a concern that leaving the trend analysis for a year is a long period and risks masking certain trends.

There is also the added complication of furloughed employees, as a lot of companies will still have a significant number of people on furlough. The Government Equalities Office has issued guidance on how to treat furloughed employees, defining furlough as a form of leave. Employees used to calculate your pay gap must be ‘full-pay relevant employees’, meaning that those on reduced pay are excluded. Some employers are doing the calculations using both sets of data – excluding and including furloughed staff so that they have both as a reference point and supporting greater analysis. The supporting narrative is crucial. Greater guidance on how to calculate your pay gap figures can be found here. There is also greater focus on diversity and inclusion across the board. Many companies are appointing Heads of D&I and are already calculating their ethnicity pay gaps, which is anticipated to be rolled out in the short-term.

2. National Living Wage increases in April 2021 – this increase of 2.2 per cent from 1 April will be available to people aged 23 and above, widening the net which is currently set at 25 years and older. This will affect lower-paid workers and continues to create upward pressure on supervisor pay to ensure that there is enough differentiation for the role’s level of responsibility. Employers are having to closely monitor their pay scales to ensure that pay progression is intact.

Especially in light of the pandemic, there is a political dimension to Healthcare sector pay levels. The three year pay deal comes to an end this year but little or no increase in pay will attract a backlash in light of the role healthcare professionals on the front line have played. Private healthcare providers are also reporting pressure on their pay levels. Greater comparisons from public and private employees working closely together in response to the pandemic have led to them benchmarking against key NHS roles.

Get in touch

Speak to us about your approach to upcoming pay reviews for 2021 – we can help to ensure your pay levels remain competitive and provide accurate pay benchmarking data to drive down employee turnover.