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Paydata recently brought together HR professionals from a variety of sectors to discuss the picture on pay for the year ahead based on the provisional results from our Pay and Labour Outlook for 2023 Pulse Survey. Widespread strikes, the cost of living and rising inflation means that pay is an evolving and delicate issue facing employers. With 45 per cent of respondent employers expecting their main pay review to be held in April, many will be setting their 2023 pay budgets now.

Here we outline the pay pressures that will shape the picture on pay in the year ahead based on key discussion points from our pulse survey results and supporting workshop.

The risks of using inflation to inform pay increases

While there are many upward influences on pay, the key downward force is affordability. Costs for employers and employees are only escalating, meaning that stark comparisons with 11.1 per cent inflation in terms of how to set pay fairly this year mask the nuances involved and shape employee perceptions about current pay rises. Pay awards were largely consistent, despite external influences, up until March 2021.

Even though there has been an uplift from two per cent on average since 2011 to a projected five per cent in 2023, the failure of pay awards to keep pace with inflation risks being seen as unfair. For 2022, 17 per cent of organisations increased their award between their autumn 2021 prediction and the end of 2022, by around one per cent. The mode remained largely unchanged, with three per cent remaining most common after May 2022.

The Office for National Statistics (ONS) expects inflation to fall sharply from the middle of 2023. The average earnings graph below highlights the point at which the average earnings plummet between February and May 2020, but by May 2021, the average earnings went right back up before stabilising. Figures often reflect 12 months’ difference in economic outlook. If the ONS expects inflation to significantly reduce to be closer to two per cent by the end of 2023, this may ease pay pressure in the long term. However, it may be too late this year for some employers who are accounting for inflation in spring pay reviews.

The impact of recruitment and retention

The competitive labour market is highlighted by a significant rise in out of cycle pay increases. The cumulative effect of the median pay reviews reported on our pay database of 3.5 per cent combined with the median out of cycle pay increases of 1.75 per cent means that the overall pay budget over 2022 reached 5.25 per cent. This level is getting closer to the figures for average earnings projected by the Monetary Policy Committee which tracks how much earnings are moving by.

What was termed the ‘Great Resignation’ in the wake of the pandemic may in fact have been buoyed by the fact that many had been hesitant to move roles as the restrictions necessitated by Covid-19 meant that uncertainty reigned. Once lifted, as many took stock, changed careers, or took early retirement, some employers experienced very high turnover levels as there had also been a pent-up demand for people to leave who were ready to move on. A whole host of demographics stopped working who are now in high demand. Levels do seem to be plateauing after the record levels of vacancies seen in the summer of 2021, with provisional results showing only 52 per cent of employers anticipating retention difficulties in the next six months; but 69 per cent expect to experience recruitment difficulties.

Anecdotally, while Christmas generally sees slower recruitment and retention activity, uncertainty in the economy is having a stabilising effect on employee turnover as people hesitate to be the last one through the door during uncertain times. Equally, the skills shortage is driving 63 per cent of our pulse survey respondents to offer higher salaries, with two thirds offering up to 10 per cent more. Employers are having to be more innovative to recruit – using LinkedIn, analysing exit interviews to identify drivers for employee turnover, and communicating wider reward packages, including encouraging ‘recommend a friend’ schemes to harness employee networks.

A trend towards pay transparency

When considering the total reward package, it is important to acknowledge the significant increase that the projected five per cent pay award for 2023 represents. Stark comparisons with inflation mask the fact that inflation has remained so low for so long and the turbulent events of the Ukraine War, the energy crisis and rising cost of living will hopefully stabilise over 2023. Setting pay in these circumstances is challenging.

Being open and transparent about the process the organisation goes through in setting its approach to reward is one way to address any misconceptions around pay. Salary benchmarking to ensure it is competitive and evidence based should be crucial to pay calculations. Supplementing pay, which 23 per cent did in 2022 through non-consolidated one-off payments of a median of £750, and 17 per cent of respondents to our pulse survey are considering making these payments in 2023, should be done with the acknowledgement that this is a gesture of support for employees in recognition of the economic circumstances. Many have changed the language used to remove reference to any ‘cost of living’ payments to delink them with inflation and show that this is a temporary support package.

Employers are also emphasising the importance of drilling down into the overall figures of employee turnover to identify immediate risk areas, as specific business units and roles may be affected by pay differently. Many employers are saying it is too early to assess whether non-consolidated payments are required in 2023, waiting until June/July to evaluate their pay pressures. This will depend on whether people are still paying high prices in areas such as petrol and energy.

Communication is key

Employers are mainly concerned about the reaction of employees once they communicate the reward approach. Many shared concerns about January pay awards of up to five per cent being sustainable and affordable to them but not keeping pace with official inflation figures and how this will be received by employees.

It is important to factor in what is informing the narrative around pay – sector comparisons are often tricky with pay scales involved in the public sector and many unions talking about real terms pay cuts. Whereas those sectors who are flourishing, such as water and electricity, are seeing increases of up to seven or eight per cent. While public sector pay has generally been eroded over the past few years, trade union involvement should be yielding between a half or one per cent increase, but many unions point to factoring in inflation now.

During the pandemic, communication was essential around pay, helping employees feel secure and informed in unprecedented times. Reduced salaries and furloughing were communicated with the message that employers could not afford to overextend themselves in times of uncertainty. This theme remains for many. Where this is applicable, employers must emphasise that protecting people’s jobs is a key factor in the award offered.

Have your say

Our pulse survey is still open – contribute your views now. We look forward to hearing how you will approach your reward strategy in the year ahead.

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