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The hidden cost of out of cycle pay increases continues to rise and impact annual pay budgets. This trend is being driven by the competitiveness of the labour market, talent shortages and the uncertainty surrounding Brexit. In many cases, employers are paying a premium in order to attract and retain the right talent.

A global recession

Economists have pointed to the inevitability of a global recession in 2020, as all markets are on the trajectory heading towards this, based on global economic cycles. Investors warn that the degree of Brexit’s success in January will determine its long-term impact on the UK market and how that recession is felt and perceived in real terms. Averting an abrupt no-deal recession on 31 October has avoided an imminent recession, but the longer-term effect is yet to be understood. Stalled growth in uncertain markets has meant that British business investment has reduced by 1.1 per cent since the 2016 referendum, in contrast to the average 10 per cent investment experienced by other industrialised economies during that period.

Last in, first out

Employees are directly impacted by market uncertainty, with fewer likely to move because of the approach to cutbacks that prevailed in the 2008 recession that was largely based on the idea of ‘last in, first out’. The implications for HR are that it will be harder to recruit than retain. Two thirds of employers are already paying up to 10 per cent more to attract new recruits. Paying a premium for successful candidates is reflected in a recent report by the Office for National Statistics on pay in 2019, which captured the annual percentage change in hourly earnings for job stayers at 1.6 per cent compared to eight per cent accessed by those who changed jobs. Movement in the labour market is creating wider pressure on wages.

Reassuring current employees

Customers are also noticing that current employees are increasingly emboldened to ask for pay increases to stay. This generates new challenges for HR linked to equality, as they must ensure that there is still parity of pay within their existing pay structures, which requires more administration and resource from HR teams to properly address – adding to their workload. Upholding a system of fair pay is more acute in certain sectors such as house builders and construction, where traditionally there is less of a pay structure in place and individuals willing to ask determine whether they secure increases, in a case of ‘who shouts the loudest’ reaping higher reward.

Out of cycle pay decisions

81 per cent of respondents to our Spring UK Reward Management Survey used out of cycle pay increases in 2018. The two most quoted drivers for using this type of increase are market pressures (52 per cent of respondents) and internal pay alignment (42 per cent). 83 per cent anticipated using them in 2019. These continue to be used to supplement ‘official’ pay review figures, which risks escalating the true cost to employers over the course of the year and undermining pay structures in place.

The importance of an equitable framework

Whilst pay flexibility to respond to recruitment and retention issues is key, having a framework in place eases pressure on HR managers tasked with addressing equality within the workplace and transparency around pay. This provides a basis for rational, enabling consistent pay decisions to be made.

To keep this within the acceptable limits of pay growth, consider the following questions:

  1. Is the employee out of their salary range?
  2. Is a permanent change in salary required or would a bonus for project-related work be more appropriate?
  3. Will this change require an immediate change or can it wait a few weeks until the performance management cycle?
  4. Can the team deal with similar requests from a budget point of view if this is approved?

Considering the wider impact of making an increase ensures that you stay alert to the incremental impact of out of cycle pay increases when used to tackle recruitment and retention issues.

To find out more about developing reward strategies that guide decision-making and drive successful workplace cultures, contact us today.

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