What every employer needs to know about pay benchmarking in 2020

With recruitment and retention challenges at an all time low in the wake of the coronavirus outbreak, many believe it will be an employer’s market over the coming year. However, according to our UK Reward Management Survey, 68 per cent of respondents are prioritising pay benchmarking in the wake of coronavirus. This may seem counter-intuitive at first glance – with fewer recruitment and retention challenges, why make sure you are still paying competitively when the labour market is in your favour?

Here we discuss how pay benchmarking can secure sought-after skills and drive employee engagement post-pandemic.

Timing has been crucial

The timing of employers’ 2020 pay reviews has been critical in shaping annual pay awards. In January, few would have predicted the effect of coronavirus on their operations and inflation was higher, resulting in pay increases being more generous. As the pandemic began to unfold and employers found themselves rolling out remote working, April pay increases reduced from three to predominantly two per cent. Many who had scheduled pay reviews for July have put these on hold and overall, there has been an increase in the number of employers expecting a pay freeze – from three per cent of employers in autumn 2019 to 12 per cent in spring 2020.

Whilst pay increases had been steady over the last year at around three per cent, caution around the impact of Brexit had leveled these out and the aftershock of the pandemic will flatten this for the next two years. This is the length of time many employers in our HR Groups (brought together virtually to discuss challenges they share in their specific sectors) say it will take to recover levels of pre-pandemic profitability. Concerted efforts by employers to move away from a decade of relatively flat wage growth have been hampered by the uncertainty generated around the pandemic.

An employer’s market

It has been a candidate’s market for the last two years, but employers are back in control. Job security traditionally drives down retention difficulties, with one in five expecting challenges in retaining people. Similarly, fewer than one in three expect recruitment difficulties. These are the lowest figures we have seen since the financial crisis in 2008/2009.

We can see from pay practices that fewer employers need to pay a premium to attract talent – a reduction from 63 per cent in autumn 2019 to 48 per cent in spring 2020. This was a key recruitment tool before the pandemic, with two thirds offering up to 10 per cent more than current incumbents. However, it is important that employers monitor their approach. Benchmarking in a flat pay market remains invaluable in identifying talent and skills that are being fought over. The danger of using across the board pay increases at the moment is that there are key skills out there commanding a premium in the market, which can be identified through benchmarking.

Segmenting pay awards

Segmenting the workforce when determining pay awards will be utilised more to identify top talent. The most common method of determining increases remains a combination of across the board and individual increases, with 26 per cent of employers adopting this approach. 23 per cent of respondents currently follow an across the board increase, but we expect this might change over the next year.

Sought-after skills and increased competition around certain roles may result in pay being bolstered by competition whilst wages remain flat elsewhere in the organisation. Pay benchmarking helps to identify roles that are harder to recruit for and command a premium – making a combination approach more manageable. Greater retention challenges are being reported for infrastructure roles and employers increasingly struggle to recruit for IT and digital roles, perhaps reflective of employers needing to bolster IT capabilities in light of greater remote working. Pay awards need to remain responsive even in an employers’ market.

Leading in a crisis

In addition to upholding a fair approach to pay, a key priority of HR departments is looking after employees, especially in the way they communicate. Being fair and transparent is crucial; 97 per cent of employers think that their response to the current situation influences employee opinion of them as an employer. 48 per cent of employers think that their employees are ‘very satisfied’ and 41 per cent think they are ‘somewhat satisified’ with their response, which will translate into lasting memories of them as an employer.

As many CEOs have taken pay cuts and contributed to hardship funds in an effort to signal collective support to their workforce, they are mindful that they need to create meaningful and impactful change. The conversation turns to benchmarking their remuneration, which is important in light of complying with CEO pay ratio reporting, alongside how much they should give back to support their workforce.  With pay cuts, furloughing employees and prioritising pay to attract the right skill-set, employers are facing enormous challenges. Equally, the way employers act now will have profound consequences with employee relationships in the long-run, making access to objective data to inform pay decisions across organisations crucial.

Deriving value from reward

Only four per cent of employers think the size of bonus payments will increase and six per cent think the number of people receiving bonuses will go up over 2020. In autumn 2019 just five per cent expected a decrease in bonus sizes, compared to 34 per cent this year. To drive engagement in spite of this and to tackle flat wage inflation, non-financial rewards become increasingly important. Employers can differentiate their approach through creative benefits, such as volunteering days that also contribute to the culture of the organisation and define the values collectively shared by all employees.

Total Reward Statements can also reinforce the value and investment provided by each employer. They can promote a greater focus on other benefits, underlining the fact that the organisation is a good employer and a mission-driven company. This is a very new concept in some sectors that have relied on traditional pay and cash benefits, but this can help to present the full picture of remuneration so that employees can truly understand the full value they derive from their work.

Get in touch

Speak to us today to discuss how you can drive employee engagement and accurately benchmark pay across your organisation.