Adapting pay strategies to cope with the cost-of-living crisis

cost of living crisis

Need to know:

  • Sweeping pay rises may not be achievable for many employers, but spot bonuses can help staff without as heavy an impact on yearly budgets.
  • Financial wellbeing and flexible pay tools can help employees gain greater flexibility and control over their money.
  • Effective communication of the benefits available to staff, as well as investing in open and honest conversations around pay and finances, is integral in supporting staff.

Soaring energy costs, rampant inflation and tax rises have conspired to create a cost of living crisis at a level not seen for decades. With UK inflation rising to 6.2% in February, and predicted to increase to 7% in the coming weeks, far above wage growth, the resulting loss of disposable income is now a substantial source of stress for many employees.

The obvious way to ease financial worries would be to offer pay rises in line with, or ideally above, inflation. For most employers, however, given the current economic uncertainty, this is not a realistic solution. Nevertheless, they are coming under pressure to help their staff cope with the crisis.

Increasing compensation

While employers might want to offer significant financial support to their staff in the face of rising living costs, they have to remember that this is an uncertain period for businesses as well.

Tony Guadagni, senior principal at Gartner HR, says: “The current economic situation is posing a major headache for businesses, as staff are seeing their disposable incomes reduced and expecting their employers to make up the deficit. Widespread pay increases are risky for [organisations] in a period of rapidly rising costs.”

Recent data from Gartner shows that about 37% of organisations around the world plan to increase compensation in response to inflation, but only 13% say that all employees will see their wages go up. Meanwhile, most organisations will not match the current inflation rate, with increases to base compensation likely to range between 2% and 4%.

Many organisations are having to make compensation increases part of a safer, longer-term strategy, and must find other ways to mitigate the financial burden on their employees in the short-term, explains Guadagni.

“Many are using spot bonuses to increase an employee’s compensation without having the same long-term impact on overall budgets that a general rise in base pay would,” he says.

“Others are increasing the frequency and flexibility of payments to staff. Though there are additional payroll processing costs for the organisation, workers appreciate the flexibility that more frequent pay allows, especially during periods of uncertainty.”

Everyday costs

In his Spring Statement in March, Chancellor of the Exchequer Rishi Sunak announced an increase in the national insurance (NI) threshold by £3,000 and a cut in fuel duty tax of 5p a litre, in an attempt to ease the burden of the cost of living crisis. While the NI threshold raise was welcomed, many insist that employers need to do more to support their employees through a difficult time.

Heidi Allan, head of financial wellbeing at consultancy Lane Clark and Peacock (LCP), says: “From our latest research, we know that the majority of [organisations] are underprepared when it comes to their employees’ financial wellbeing, with 57% stating that their strategy to support financial health needs work or hasn’t yet been started.”

Practical initiatives include access to financial wellbeing apps, such as Wagestream, which provides personal finance tools that allow people to choose how often they get paid, track their shifts and earnings each day, and chat with a personal money coach.

Callum McCaig, director of strategic communications at Wagestream, explains that the most popular feature has been ‘Track’, which employees use to track their shifts and pay in real-time throughout the month.

“For a shift worker on volatile pay, the ability to plan and budget with certainty can be life-changing,” he says. “Others use it to choose how often they’re paid throughout the month, chat to a personal financial coach, or set up rainy day savings pots.

“By rounding down workers’ pay for individual shifts, and moving those pennies into savings pots that generate interest or win prizes, people can save even during tough financial times.”

Wagestream is also rolling out additional budgeting tools, bill calculators, food shopping discount vouchers, and switching services within the app.

“This will make it easier for people to think about their bills, stop being over-charged, and start getting a better deal, through a service that is being subsidised by their employer,” says McCaig.

Beyond the basics

Employers should also consider what financial support they can offer via their broader benefits offering. There may be scope to offer things like interest-free loans for travel season tickets to reduce commuting costs, or create tax savings through salary sacrifice arrangements.

Communication around benefits that can ease employees’ financial struggles is more important than ever in the face of a cost of living crisis. Many workplaces offer discount schemes, such as shopping vouchers and cashback deals which can help mitigate the impact of inflation, but these are often poorly communicated and, therefore, underused by employees.

Jane Hulme, HR director at employee benefits provider Unum UK, says: “Make sure employees are fully aware of all the benefits [the employer] currently offers, and how to make the most of these and amplify communication of workplace [individual savings accounts] (Isas) and pensions as methods of providing long-term financial security.

“Signpost them to the employee assistance programme (EAP). These often provide help with budgeting, saving, investing, retirement planning, and taxes. If [an employer] doesn’t have an EAP, [it can] let employees know that they can also get free, confidential and independent money and debt advice from the government’s Money and Pensions Service.”

Open and honest

Keeping honest, judgement free communication channels open between employees and line managers about financial challenges can also help break down the stigma associated with money problems, making it easier to deal with issues early on, before they lead to stress-related absence.

In the absence of inflation-busting pay increases, employers also need to remain open and transparent when it comes to pay reviews. Even if the review does not lead to a pay rise, a business should be able to show that due thought and consideration has gone into the decision, and be clear on their expectations of staff.

Hannah Copeland, HR business partner at employment law and HR support firm WorkNest, concludes: “Yearly pay reviews are recommended unless a business operates performance-related pay, in which case, individual objectives can be linked directly to business performance.

“In this situation, employees become more able to control their income based on what they deliver. [Employers] must not fall into a trap of offering pay rises based on individual needs. There should be a clear structure surrounding pay and promotion.”

Employers are facing a difficult period ahead, and the urge to support staff with living costs has to be balanced with a savvy approach to protecting future jobs. A comprehensive benefits package, which includes financial education and wellbeing tools, as well as strong communication channels, could make all the difference for both staff and businesses.