The upward pressure on pay
The influence of inflationary figures can be measured by comparing historic inflation with pay figures from Paydata’s comprehensive pay database.
This analysis highlights how, as inflation has risen, so too have actual awards, when compared with predicted awards in the preceding year:
- For example, predicted 2022 awards in autumn 2021 were two to three per cent but by the end of 2022, actual awards were between three and four per cent.
- Likewise, predicted 2023 awards in July 2022 were three to four per cent but are currently largely five per cent.
However, unlike in 2021 and 2022, inflation has started to fall this year. The latest inflation figures released by the ONS last week show that the Consumer Price Index (CPI) has reduced from 8.7 per cent to 7.9 per cent and the Retail Price Index (RPI) from 11.3 per cent to 10.7 per cent.
Cumulative movements of inflation and pay awards
The comparison of inflation to pay awards up until this year indicated that cumulative pay awards from 2014 to 2021 outstripped inflation, only to be overtaken by inflation by the end of 2022. This is due to average pay awards (3%) being significantly below the average annual inflation (4.6%) in 2022.
Even though the pace is slower than the Monetary Policy Committee predicted, inflation has started to plateau. When it comes to next year’s predictions, we do not anticipate the same incremental pay award increases between now and the end of 2024.
The opportunity to target pay and differentiate
With higher pay awards comes greater opportunity for employers to differentiate their pay approach. This is where an employer may provide a standard increase to everyone of say around three to four per cent, while reserving an additional one to two per cent for higher performers or roles that have a higher market premium, as an employee retention tool. While the most popular anticipated method of distributing pay awards in 2024 is an across-the-board increase for 38 per cent of employers, 33 per cent expect to use a combination of across-the-board and individual increases.
Upward pay pressure on employers is further exacerbated by the rise of the National Living Wage and National Minimum Wage rates. In 2024, many employers are being mindful of the knock-on effect of these pay rises when it comes to their wider pay framework, and fairly awarding those with larger role remits and greater responsibilities.
Out of cycle pay awards
The picture around pay is further complicated when out of cycle pay awards are considered. These incremental increases exclude pay adjustments in the usual course of promotions throughout the year. In 2023 and 2024, respondent employers to the Pulse Survey expected these types of awards to account for an additional one per cent of their annual pay bill. This skews the picture on pay and whether some individuals access higher remuneration because of wider market pressures.
These increases have likely been driven by a highly competitive labour market where there is a shortage of skills, where people are paying increases out of the normal review cycle. They are an influence on pay to bear in mind when it comes to competing for top talent and what is shaping the labour market in terms of employee turnover.