CIPD report suggests ongoing slump in wage growth means we need to rewrite the rules of retention
Pay hikes are supposed to be on the agenda now the economy is showing tentative signs of recovery. But what if we never see a real-terms increase in pay ever again?
That’s the scenario painted by a new CIPD Megatrends report, Have we seen the end of the pay rise?, that says it is unclear when, or even if, we will see above-inflation wage growth.
Though the economy is forecast to grow during 2014, the report’s author, CIPD chief economist Mark Beatson, says a period of “stagnation” still cannot be ruled out. “It is quite possible that the recession and its aftermath have reduced the ability of the UK economy to grow year on year.
“That might lead us to the position where wages keep track with prices or little more. If the scope of pay increases is limited, how will we recruit and retain? There is a real issue about making the best use of reward budgets. Alongside that, if you cannot take for granted a 2-3 per cent increase each year as a way to show workers they are appreciated, what will you need to do instead?”
Pay pain isn’t guaranteed, says Beatson. In particular, if businesses are able to increase productivity (which remains below pre-recession levels) it could have positive effects for their own cash flow and the wider economic picture. Sharper recruitment practices and investment in training can both help here. As Beatson says: “HR holds many of the levers to increasing productivity.”
But the possibility that pay won’t be a significant part of the reward and retention mix has profound implications for HR professionals. Among other things, they should consider the impact on the psychological contract, says Deborah Rees, director of consultancy at Innecto Reward.
“There has been a sense that many organisations have struck a deal that says to employees ‘if you stick with us through the bad times and accept lower or no pay rises, in return when things start to get better we will start to move pay a little in your direction’,” she says. “I think that time has come.”
For employers unable to make good on such promises, CPD opportunities, non-financial recognition and clear communication of other non-wage benefits are all part of the solution, says Gemma Bullivant, group head of HR at Bluefin Solutions, a global consultancy and SAP partner. But she also points to the need for transparency – pay rises need not have an impact on motivation and retention, she says, provided employees feel they are being paid fairly.
“If people feel that they have a fair deal, their primary focus is their future career, their development opportunities and so on,” she says. “But if they feel their pay is unfair it becomes a big problem.”
Angela Wright, a senior lecturer in HRM at Westminster Business School, says that although pay overall is unlikely to rise above inflation, the picture will vary between sectors.
“This is an average,” she says. “It does not mean that no one will be getting a pay rise above inflation.” Salaries in finance and some parts of manufacturing, for example, are picking up pace, Wright says. There is also variation by job level, with proportionally larger rises at the low end, where the minimum wage has an effect, and at the top end, where skills shortages tip the scales in workers’ favour. “Those who are most likely to have below-inflation wage rises are people working in the middle levels of service organisations in the public and private sectors.”
“Get as much information as you can about your market situation,” says Wright. “Make sure that you use several different sources and check the quality standards and relevance of the data you use for benchmarking.”
It’s not bad news in every sector
Royal Bank of Scotland hit the headlines for reportedly planning to pay bonuses worth double bankers’ salaries. The Independent Parliamentary Standards Authority, the body that sets MPs’ salaries, has defended its plan to give them an 11 per cent pay rise in 2015. And the defence and aerospace industries are outperforming the market, according to IDSPay.co.uk.
✶ Read Have we seen the end of the pay rise? at bit.ly/CIPDmegatrends
£7 minimum pay on the cards
There could be good news at the bottom end of the pay spectrum as chancellor George Osborne says he believes the economy “can now afford” an above-inflation increase in the national minimum wage.
An assessment on the impact of raising the adult rate to £7 an hour in October (from £6.31) has been sent to the Low Pay Commission, which is due to report on how much, if at all, the wage should rise.
Deborah Rees at Innecto Reward says such an increase would have a knock-on effect. “It will have a massive impact at the lower end of the pay scale, and employers will be under pressure to make more inflation-busting pay rises further up the food chain.”
The government has also announced a crackdown on businesses who flout the rules, with a quadrupling in the fines for failure to pay the NMW. Currently, employers are required to pay the wages due, plus a penalty of 50 per cent of the total underpayment (up to £5,000). Subject to approval by Parliament, the penalty will increase to 100 per cent (up to £20,000 in total) and could come into force in February.