Rewarding staff when inflation is high

If you read nothing else, read this…

  • The lag between pay rises and inflation in the UK could have serious consequences for employers that want to remain competitive and reward performance.
  • Employers should be clear about how reward aligns with business strategy.
  • Financial education services and employee assistance programmes (EAPs) can help employers provide support to staff who may be affected by debt problems.

With pay rises lagging behind inflation, employers need to consider how to keep their staff happy, says John Charlton

For those not among the fortunate few who more or less set their own pay rises, 2011 has been a year when many have seen the value of their earnings fall. To paraphrase Dickens’ Mr Micawber, a pay rise of 5.4% compared to inflation of 2.6% equals happiness. Reversed, it equals misery.

The latter is where many UK employees are. The Incomes Data Services (IDS) Pay Report, published in October, found that pay rises for the 12 months to the end of September were about 2.6%, while the retail price index (RPI) and the consumer price index (CPI) for October hit 5.4% and 5%, respectively. Unless you are a FTSE 100 board executive, enjoying an average 49% pay rise in 2011, according to IDS, or maybe a high performer, then inflation is outstripping your wages.

This is an issue responsible employers have to face because it affects their reward, performance and staff engagement policies, and means financial hardship is rising in their workforce. The gap between pay rises and inflation may have serious consequences.

But employers can only award pay rises they can afford. Charles Cotton, performance and rewards adviser at the Chartered Institute of Personnel and Development (CIPD), says: “One of the main drivers in organisation that are increasing salaries is whether they have the money to award them, and the impact of productivity and performance. Inflation is not an issue.”

For private sector employers, being competitive is a must. Chris Charman, reward, talent and communication director at Towers Watson, says: “Employers need to remain competitive to ensure they can continue to offer work, and being competitive means ensuring their fixed cost base does not increase faster than their competitors’.”

Rewarding performance

Employers remain cautious about increasing fixed costs in the current climate, but are aware of the need to reward performance and commitment, says Sarah Lardner, senior consultant at Innecto Reward Consulting. “Som employers, particularly smaller, entrepreneurial ones, are tending to apply pay increases in a discretionary manner, typically based on high potential, performance and loyalty,” she says.

Charman feels employers are not responsible for bridging any pay-inflation gap. “They need to be alert to the ongoing threat of losing key and high-performing talent who could be disgruntled by loss of income in real terms,” he says. “If there is a return to recession, then a one-size-fits-all approach may not work. Employers will need to think hard about more strategically segmenting their approach to human capital.”

Charman says employers must align pay and reward to their business strategy, acknowledging high performers and key staff. “It is all about being clear on the business strategy, the people and skills needed to execute it and focusing rewards accordingly.”

That means pay differentiation, or giving key staff bigger rises than others, he says.

Mercer polled 400 compensation and benefits and HR managers during a webinar in October and found that 87% of delegates said their organisations differentiated salary awards on the basis of performance. Also,
44% of the 400 said their organisations would spend proportionately more on high performers, thus increasing pay differentiation.

Only 5% said their organisations would spend less on performance-related pay. Mark Quinn, partner, human capital, at Mercer, says: “I’d say there’s a real increase in the number of organisations using variable pay tied to organisational success.”

Staff engagement

Staff engagement is another factor when pay rises are low. Cotton says employers must keep an eye on this or “good employees may decamp when the upturn comes”.

Engaging staff need not be costly. Planning career and learning and development paths with staff is an option, as is encouraging involvement through leadership. Reward also helps, says Cotton. “CIPD research shows a trend to expand share option schemes to all or many employees, which is a short-term, low-cost way of rewarding them.”

Nevertheless, variable rises, pay freezes, pension contribution increases and rising inflation equals hardship for many employees. What can employers do to help them?

If they don’t want to spend, they can provide information on free advice services, such as the Money Advice Service, charity Turn2Us, or the Citizens Advice Bureau. Otherwise, the benefits weapon of choice is an employee assistance programme (EAP), which should include financial advice.

David Smith, senior EAP consultant at provider Workplace Options, says: “If you have money problems, your world starts to collapse and the risk of doing something inappropriate rises. We are seeing a 50% rise in calls related to debt problems.”

But nothing remains constant and with the Bank of England forecasting a sharp fall in inflation in the new year, the pay rise/inflation equation could look very different in the fairly near future.

How do the pay numbers add up?

  • For the three months to September, VocaLink’s FTSE 350 Take Home Pay Index, annualised, was 2.2%, a fall from the 2.7% recorded for the three months to August. Its Manufacturing Index showed take-home pay remained at 2.1% in September. For services organisations, the figure fell to 2.3% from 2.7% in August, and for the public sector it was 2%, up from 1.7%.
  • The IDS Pay Report, published by the Incomes Data Services in October, reported zero pay increases in the public sector in the three months to the end of September. It also found the median rate for pay rises in the private sector in the same period was 2.6%.
  • The Pay Report found that just over half of all pay freezes it recorded were in
    the public sector. Only one pay freeze was recorded in the manufacturing sector, where the median rise was 3%
  • Mercer’s TRS Quarterly Pulse Survey, published in November and based on an analysis of 329 organisations’ pay plans, found employees in the UK will experience another year of below-inflation pay rises in 2012. It says UK organisations are expecting employee base pay rises of 3%.

Duty of care

Andrew Kinder, chief psychologist at provider ATOS Healthcare, says: “There is definitely a rise in stress issues related to financial problems.”

This can be tricky legal territory for employers, who have a general duty, under the law of negligence, to take reasonable care of their staff, says Mark Taylor, partner at law firm Jones Day. “This extends to
working conditions and includes a duty not to place an employee under unreasonable levels of stress in the workplace. Once an employer is aware of a condition such as stress caused by external factors, its duty is to take reasonable care not to do anything unreasonable in the workplace which makes the condition worse.”

Taylor says employers have no duty of care for an employee’s financial wellbeing, but if they give advice, they must ensure they take reasonable care.

“Employers will generally be careful to ensure that advice [from employee assistance programmes] is offered solely on the basis that it is the employee’s choice to take up that assistance, and that the employer can in no way be liable for any decisions made by the employee as a consequence.”

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