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Our autumn edition of the UK Reward Management Survey highlighted how pay levels have been the highest on record for a decade. Here we examine the anticipated influence of inflation in the year ahead, and analyse whether pay levels may have peaked ahead of 2024.

Look out for our New Year pulse survey and discussion forum, which will present an updated snapshot of pay plans for 2024.

Average earnings

Underlying pay growth has picked up since summer 2022, accelerating during 2023. Pay awards increased from tracking stable inflation levels since 2008 of between “up to two” and “up to three” per cent, relenting to sustained upward pressures on pay.

Stated 2023 pay reviews were a median of five per cent and across all sectors, 2023 pay awards were significantly higher than last year. Only two per cent of employers in the UK Reward Management Survey reported operating a pay freeze.

New permanent hires have been declining over the last year according to the KPMG/REC survey. This may ease the pressure on regular pay growth for 2024. The median current pay prediction for 2024 is 4.5 per cent, with many employers highlighting the crucial role of pay benchmarking to ensure they remain aligned to the market in 2024.

Falling inflation may reduce pay pressure

46 per cent of respondent employers highlighted how they expect revenues to increase in 2024, supported by falling inflation. While inflation has fallen from 11.1 per cent, the highest level since October 1981, the latest figure is 4.6 per cent. A similar rate is expected on 20 December 2023, meeting the government’s aim to reduce inflation to below five per cent by the end of the year.

In spring 2023, the Office for Budget Responsibility (OBR) forecast that inflation would fall sharply in 2024 to 0.9 per cent. The Bank of England said that inflation would be back to the two per cent target at the end of 2024. However, in the wake of the autumn statement, the OBR was more conservative about the fall in inflation, now predicting it will be 2.8 per cent by the end of 2024. The Bank of England also adjusted its prediction to 3.4 per cent in 2024.

Employers’ fears associated with offering greater pay increases this year, in terms of setting a precedent and increasing the pay bill without necessarily increasing productivity, may be contributing to the sustained costs facing both employers and employees. In the context of wider debt levels, the picture on inflation is more complex than ever, with employers keeping a keen eye on the continued impact of interest rates on pay awards for 2024.

Affordable increases

In April 2024, there will be an increase in the National Minimum Wage in April 2024. The Living Wage Foundation is also encouraging employers to keep up increases to support employees. This particularly affects those sectors with roles that are on or around the minimum wage pay level, such as Residential Care, Healthcare and Facilities Management.

Some commentators have said that raising minimum levels is already happening in a competitive labour market, so employers should be able to absorb the minimum 58p increase. The government is pledging their commitment to “ending low pay”, in order to uphold living standards and balance employer affordability with employee need. Living Wage Foundation director Katherine Chapman said that the National Minimum Wage may fall short of the Living Wage recommended rate for 2024, which is “the only rate that is independently calculated based on the cost of living.”

Employers are increasingly looking at their pay strategy to ensure that pay is meaningful. Job evaluations are a key priority in 2024, to ensure that there is an objective pay structure in place which reflects the scope of the role and the level of remuneration. Meanwhile, pay compression is a real concern when minimum wage is driven up, as there is a risk that pay levels between certain employee groups are not differentiated enough to reflect greater responsibility between pay scales.

Increases in the Living Wage

The European Council adopted new rules on pay transparency on 24 April 2023, under the EU Pay Transparency Directive 2023. The EU Directive aims to combat pay discrimination, to help close the pay gap in the EU.

While the directive will not automatically apply in the UK, businesses who have operations in EU member states will need to meet reporting requirements in respect of those operations, but may adopt a ‘one business approach’ across their international business. EU companies will be required to share information on salaries and take action if the gender pay gap exceeds five per cent.

Therefore, UK employers who face a global war for talent may face pressure to adopt greater transparency to remain competitive, attract the best talent and clients and satisfy calls for salaries to be paid fairly. Customers and investors are increasingly interested in a company’s record on diversity and inclusion, with many going beyond the mandatory pay gap reporting in the UK to consider their workplace representation of ethnicity, age and disabilities.

Financial Wellbeing

Incremental increases that skew ‘official’ figures

In 2023, 17 per cent paid a lump sum to supplement the base pay for employees, specifically to help them with the cost of living. This had reduced from 35 per cent in autumn 2022. The median amount of these non-consolidated pay increases offered to employees remained steady at £750.

In addition, we have been monitoring the effect of out of cycle pay awards that have been awarded over the course of the year, which excluded adjustments to pay that are traditionally given as a result of a promotion. 88 per cent of respondents to our UK Reward Management Survey had offered additional increases driven by market pressures and internally aligning market pay.

One in five reported that out of cycle pay awards, excluding those resulting from promotions, accounted for up to one per cent of their annual pay bill, further complicating the picture on pay. 88 per cent intend to use these in 2024, having the potential to significantly add to official pay figures.

A split approach to pay

Across all sectors, organisations appear to sit broadly between two camps: those who predict a similar pay award as this year of five per cent; and those who predict a smaller pay award than this year of between three and four per cent.

This reflects employer concerns over the continued pressures on inflation and the competition for key skills, which is making some employers feel that they will require the same levels of pay budget to retain and attract the right talent. Other employers are highlighting that they cannot afford to award staff five per cent, two years in a row.

Get in touch

The autumn edition of our survey captured trends that have shaped 2023 and will continue to face HR and Reward Professionals in 2024. The pay, bonus and reward trends collected from across 242 employers during September and October 2023, are representative of HR practices affecting just over half a million employees, across a range of sectors.

We support employers carrying out their pay and reward reviews and would love to support you in defining an effective reward strategy for 2024 – call us today to chat through how we can help you take an evidence-based approach to pay decisions that attract and retain crucial skills and talent in 2024.

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