A Perfect Storm of HR Challenges: Affordability, Productivity, Tech and Generational Inclusion

Before the pandemic, annual pay awards were consistently two per cent, only dipping slightly after Brexit due to uncertainty. Post-2021, inflation drove pay awards upward; in July 2024, most employers predicted a four per cent 2025 pay award, but have tracked down to 3 per cent in practice. Having peaked during Brexit and Covid, pay freezes remain rare.

For organisations affected by National Living Wage (NLW) increases, the median salary increase for 2025 stands at 4.0 per cent, with an interquartile range of 3.2 and 5.0 per cent.

Looking ahead to 2026, 3.0 per cent is the median expected pay award without NLW influence, rising to 4.0 for those affected by the NLW.

Affordability is the primary influence on pay decisions, cited by 84 per cent of respondents, with inflation and market pay rates following closely. This squeeze on budgets forces employers to be creative in reward and retention strategies to keep their most valuable resource engaged.

Productivity and driving performance

Alongside affordability, employee productivity is gaining focus. Weak UK growth, coupled with a reduction in economically active workers and long-term sickness, creates pressure on organisations to do more with less. In our autumn UK Reward Management Survey, 39 per cent of employers quote employee productivity as being a key objective for senior management; 22 per cent of respondents are already measuring employee productivity and a further 23 per cent plan to measure productivity going forward.

Hybrid working is influencing productivity. Our UK Reward Management Survey highlights that 94 per cent of organisations allow employees to work from home regularly or ad hoc, and Employee Benefits highlights how 88 per cent report that hybrid working positively impacts employees’ ability to achieve bonuses, KPIs and measurable outputs. Furthermore, only seven per cent of employees believe bonuses should be tied to office attendance, and 86 per cent of organisations have no formal policy connecting in-person presence to rewards. This demonstrates that enabling flexibility is key not only for engagement but also for sustaining performance.

Technology: The threat and opportunity of digital transformation

Productivity is under even greater scrutiny when digitalisation and AI are transforming how work is done, with significant implications for skills and jobs. Automation promises efficiency but also threatens traditional roles, requiring employers to rethink workforce planning, upskilling and reskilling.

The future of work is as much about humans as technology. Employers must balance the potential cost savings of automation against the need to retain, develop and motivate a workforce capable of thriving in a tech-driven environment. HR has a critical role in helping employees navigate these changes while maintaining engagement and organisational capability. The training and upskilling of existing staff is a key priority for 63 per cent of UK Reward Management Survey respondents, but the rate of change suggests it should be a more universal priority for employers.

Regulation: Navigating cost, pay transparency and compliance

The regulatory environment adds another layer of complexity. Even without the implications of the yet to be announced ‘Autumn Budget’, employers are balancing rising costs from National Insurance, National Minimum and Living Wage obligations and ongoing pay transparency requirements from the EU.

Paydata’s research highlights that 78 per cent of firms see pay decisions being driven by market and economic forces, while 54 per cent also consider internal relativities such as pay parity, transparency and fairness.

This dual pressure, external affordability constraints and internal fairness expectations, places HR at the heart of both compliance and strategy, tasked with protecting employees while safeguarding business viability.

The Generational Workforce: Rewarding what matters

Overlaying these affordability, productivity and regulatory pressures is the challenge of generational inclusion. The UK workforce is increasingly multigenerational: Millennials make up approximately 35 per cent, Gen Z 20 per cent, Gen X 20 per cent, in addition to Baby Boomers. Each generation has distinct values, expectations and motivators.

Understanding Generational Differences

Very broadly speaking, the priorities and outlooks of different generations are captured by the following themes:

• Gen Z (1997-2012): Digital natives who value flexibility, purpose and frequent feedback. They respond to career growth opportunities, mentorship, wellbeing perks and experiential rewards.
• Millennials (1981-1996): Career-driven and socially conscious, Millennials prioritise work-life balance, professional development, lifestyle perks and community engagement.
• Gen X (1965-1980): Pragmatic and independent, Gen X appreciates financial security, autonomy, peer recognition and health-focused benefits.
• Baby Boomers (1946-1964): Experienced and stability-focused, Boomers value respect, traditional benefits, mentorship opportunities and comprehensive healthcare.

Inclusive Reward Principles

To navigate a multigenerational workforce, reward strategies must be flexible, fair, transparent and personalised:

1. Flexibility: Give employees options rather than a one-size-fits-all reward.
2. Transparency: Clear communication of how rewards are earned builds trust.
3. Fairness: Ensure all employees feel valued regardless of age or tenure.
4. Personalisation: Tailor rewards to individual preferences to maximise engagement.

Reward Strategies in Practice

• Gen Z: Mentorship, microlearning, flexible working, mental health support and experiential incentives.
• Millennials: Remote work options, professional development budgets, lifestyle perks and team-based social initiatives.
• Gen X: Competitive salaries, pensions, sabbaticals, health benefits and peer recognition.
• Baby Boomers: Traditional benefits, public recognition, healthcare and mentoring roles.

By aligning rewards to generational motivators, employers strengthen inclusion, engagement and retention. Our research shows that 70 per cent of organisations operate a bonus scheme, with 91 per cent awarding bonuses annually and 76 per cent taking into account individual, team and company performance. Tailoring these schemes across generations ensures that all employees feel acknowledged and valued.