Charles Cotton: Employers are likely to take a targeted approach to pay post-Budget

Charles Cotton: Factors that will impact pay strategies in 2021

The focus of this year’s Budget was on supporting lives and livelihoods. For instance, to help protect jobs, the furlough scheme was extended to September, while to support small to medium-sized enterprises (SMEs) invest more in IT and improve management capability, the Help to Grow initiative was launched.

In terms of reward, while the starting points at which employees pay basic and higher rate income tax increased, from next year they’ll be frozen until 2026. So too will the pensions lifetime allowance. While the lifetime allowance freeze impacts most private-sector high earners, in the public sector, where most are in defined benefit plans, it will also hit many medium earners. Reward and HR professionals need to start thinking what the workforce and workplace implications are of these decisions and how our employers should respond.

However, we’ll have more than these so-called ‘stealth taxes’ to worry about in the coming months. The CIPD reward management survey, published in February 2021, found that 80% of employers have been negatively impacted financially by the pandemic, so increasing spending on pay and benefits will be tricky.

In terms of pay, I think we’ll see a targeted approach, something that our survey picked up. Rather than giving everyone a wage rise, it will be focused on certain groups. For instance, those covered by the national minimum wage, or essential and key workers, or those with skills in demand.

This creates communication challenges. Currently, it’s easier for employers to explain to investors or customers that they are focusing increases on those at the lower end of the pay spectrum, less so when they are focusing it at the top. If they’re targeting increases at certain groups, they’ll need robust business arguments to justify the decision, as well as demonstrating sympathy and understanding for those who don’t get a rise.

To help mitigate the financial loss and impact on engagement, we should explore financial, such as shares, or non-financial, such as extra leave, rewards to compensate employees who miss out on an increase, while recognising that non-financial rewards come at a cost.

These tricky decisions come against a backdrop where employees are almost three times more likely to report their financial situation has worsened than improved. So, employers should be focusing on employee financial wellbeing, such as introducing a policy for the first time or creating a wellbeing budget.

While some firms might think we’re now over the worst of the pandemic, we’re not out of the woods yet. Any misstep in how we reward and recognise staff contribution could create long lasting implications that could fatally weaken corporate performance. Any actions must be well thought through and need to be agile enough to reflect unexpected events, positive or negative.

Charles Cotton is senior adviser for performance and reward at the Chartered Institute of Personnel and Development (CIPD)