Navigating pay decisions during the cost of living crisis

Meaningful pay awards

Employers are increasingly struggling to afford or justify pay awards that fall so far short of inflation. Whilst the official rate of inflation increased to 10.1 per cent in September 2022, our UK Reward Management Survey in spring 2022 indicated that pay reviews were predicted to be between three and four per cent. This in itself was an uplift from two per cent in our 2021 autumn survey. Historic pay trends show that average awards have been 2 - 2.5 per cent since the 2008 recession, tracking inflation. However, after years of pay levels tracking inflation, market pressures have produced a distinct disconnect. Pay predictions for 2023 vary widely as a result.

A second pay review

Many organisations are considering what they can do to support their people, including 8.2 per cent of employers who are offering a second pay review. Employers are not being driven by rectifying weak pay reviews earlier in the year. Instead, employers are recognising the volatility of the market and are genuinely trying to do what they can to support employees within the limits of affordability and sustainability. This may be in the form of a second pay review or by bringing forward their 2023 pay reviews.

“Many organisations are considering what they can do to support their people, including 8.2 per cent of employers who are offering a second pay review.”

Some are concerned at the precedent that giving an 11 per cent pay increase creates, as some employers consider bridging the gap after consistently paying two per cent increases to date. Across the board raises risk fuelling inflation, with questions over the sustainability of this approach meaning that the majority of employers we have asked are making their approach more nuanced. There are employers who are basing this on non-senior roles, who tend to earn lower wages, therefore targeting the support on offer to those who require this most.

One-off payments

“For those who can afford to offer a bonus one-off payment based on the Cost of Living crisis, the Chartered Institute of Personnel Development warns it may do more harm than good.”

Research shows that 48 per cent of organisations have paid or are considering paying a ‘Cost of Living’ lump sum, the median of which was £750. Preliminary results suggest 42 per cent of those paying a lump sum are applying this to lower earners and non-senior roles, but the rest are providing this to all employees. Others are staggering the levels of payments available to staff based on seniority.

The Chartered Institute of Personnel Development (CIPD) has warned against this, actually backfiring in some cases. For those who can afford to offer a bonus one-off payment based on the Cost of Living crisis, the professional body warns it may do more harm than good. Inadvertently, these payments can potentially undermine employees’ access to any Universal Credit or Tax Credits that they might be claiming, so this needs to be well planned. It is a delicate balance for those who have also based the payment on seniority, as if it is based on salary, a cut off threshold could be controversial if people are just over the upper pay level and are not eligible for the payment, raising questions of how to fairly administer this.

Financial wellbeing and wider benefits

The CIPD is encouraging employers to alleviate the financial burden placed on their employees by the cost of living crisis through greater wellbeing support. Others are offering flexible benefits so that employees can choose whether they take vouchers or the value of healthcare plans through lump sums, enabling employees to define the value they derive from the package on offer. We are seeing more employers requesting support for producing Total Reward Statements which outline the full investment employers make in each employee.

While bonus levels are set to remain steady, employers are supplementing their benefits packages by offering greater access to financial education programmes, interest-free loans and hardship funds to lessen the impact of rising costs on both sides of the employer relationship. The link between financial health and mental health should also not be overlooked, with Aon outlining how inflation is impacting every aspect of benefits packages. More employers are promoting discounts available to employees and others outlined how they are offering one-to-ones with benefits consultants to ensure the plan is adequately tailored to their employees’ needs.

Communicating the approach

Crucially, as each organisation defines what is appropriate to them and their organisation, arguably the most important factor for employers to consider is how they communicate any changes or any new approach. While some employers have said they are taking the opportunity to re-launch their benefits package to ensure that they are maximising the value of their total reward packages in the minds of employees, the re-articulation of what is available is important so that employees know what is available to them. This underlines the wider investment employers are making in employees that goes beyond purely pay.

“Crucially, as each organisation defines what is appropriate to them and their organisation, arguably the most important factor for employers to consider is how they communicate any changes or any new approach.”

Any changes to the approach of reward packages has to be communicated well, or however well-intentioned, they can actually backfire. This especially applies where employers have been giving incremental pay increases but make the stretch to give employees all the support they can within the confines of affordability, this context should be shared with employees appropriately to acknowledge how it may still fall short of inflationary pressures.

Get in touch

When planning pay awards in 2022 and into the new year, employers must factor in volatile inflationary pressures and increased operating costs. Continually reviewing the situation will be crucial, but we can also help you get the pay and benefits framework in place to ensure all of these decisions are evidence-based and robust, enabling you to remain agile in your approach. Contact us today to discuss what this means for your business.