At the time of writing, the UK inflation rate is the highest it has been in the UK since 1982.
The trouble with high inflation is that the money in your pocket devalues. The salary that you are paying your employees is worth less – it buys less in the shops, and they have less disposable income to pay for the pleasures in life, as the rising cost of living is swallowing up a greater percentage of their pay packet.
For employers, this can present a dilemma. They can see (and hear) on a daily basis how their workforce is beginning to really struggle – some more than others. Rising inflation does not just act as an indicator of increasing the cost of living, and it is usually accompanied by rising interest rates. As a result, monthly mortgage and rent increases soon start to bite alongside rising shopping bills, creating a veritable double whammy for everyone.
As a responsible employer, you may feel it is your moral responsibility to help your employees by increasing wages in line with inflation. However, in unpredictable and volatile economic conditions, Paydata advises against knee-jerk wage increase decisions.
There are a couple of significant reasons for this that employers should take into account when considering a cost of living pay rise.
Is it affordable and sustainable?
Inflation does not just affect the consumer – but makes its heavy-fisted impact across the business and commercial sector, often imposing over inflation price increases on raw materials and supplies that have to be absorbed and ultimately passed on by the business.
Over the past year, inflation has risen from 3.1 per cent to 11.1 per cent. Long-term predictions expect inflation to be around 6.4 per cent in 2023 and drop to 3.5 per cent come 2024. At what point do you fix that inflation wage increase? How much do you put your faith into these predictions? Is implementing a pay rise based on inflation truly sustainable for your business, or will it palace additional strain on cash flow? Remember, once a pay rise has been implemented, you cannot reduce it without causing significant damage to employee relations.
We are on the brink of a recession
During a recession, demand for goods and services historically declines. Inflationary prices in the shops reduce that spare cash that we might put into ‘luxuries’ such as going out, home improvements and holidays, while we all wait out the downturn and hang on to our pennies to pay for necessities.
A recession, therefore, inevitably leads to redundancies, and the longer a recession continues, the more chance there is of wages dropping in line with increasing unemployment.
Taking all this into account, a future scenario could mean that implementing a cost of living pay rise may be cancelled out within a short space of time by a drop in business, reduction in turnover, and the need for redundancies.
So, what is the best strategy for the coming months?
- Acknowledge the pain that your workforce is going through. Price rises affect your business as much as it affects people on a personal level, so there is a definite feeling that we truly are ‘all in this together’.
- Depending on the size of your company, develop an agreed position from your board and management team outlining the company’s stance on the current unpredictable and volatile situation, and share this extensively across all departments. Acknowledging the situation and outlining an ongoing strategy will help employees feel listened to and included, whilst also helping them to understand challenges from an organisation’s operational point of view as well.
- If you’re able to, structure a one-off cost of living payment across the board. A one-off payment is just that – a one-off. It does not add to the overall wage bill on a permanent basis but will improve employee morale and drive motivation and loyalty through the tougher times.
If you are concerned about maintaining a coherent and achievable pay structure in the coming months, Paydata can work with you to create a scheme tailored to your requirements. Contact us directly if you would like to talk through your options in more detail.