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A high-stakes game: The 2018 pay increase landscape in the UK

Recent cross-sector research from QCG showed estimated pay increases for 2018 in the UK hovering around 2.5%. Despite some degree of variation across sectors, the overall pattern at the moment is for pay increases in 2018 to be approx. 0.5% higher than they were in 2017.

But the fact remains that, with inflation edging towards the 3% mark, organisations face an interesting challenge ahead when deciding on where to set their budget for the next round of pay increases. A high-stakes game if you will. Let us take a look at key factors at play here and options available to address these issues.

First of all, there is a need to recognise that many employees are less and less willing – and able – to continue to stomach the continued erosion of purchasing power from salaries. This is of particular relevance to organisations where pay constraints and/or a conservative approach to pay increases in recent years have been testing the patience of employees.

Then, there is the issue of prolonged economic uncertainty. Yes, doomsday predictions following the Brexit referendum failed to materialise; but an increasingly weaker currency and the fact that many questions about the Brexit negotiations are still unanswered, means concerns about the future remain front of mind for many. And that is even before considering the sabre-rattling on either end of the Pacific Ocean – anyone having second thoughts about plans to visit Guam?

There are also regulatory requirements that need to be met. Factors like changes to the National Living Wage and investment to narrow the gender pay gap are likely to eat into pay increase budgets, as are dealing with accumulated pay anomalies from almost a decade of enforced pay constraints, particularly in the public sector.

Finally, there is still a competitive jobs market to contend with. There is no indication of the ‘war for talent’ easing off, with recruitment and retention of key talent still high up on the HR agenda.

So where does that leave us?

Is it time to ‘splash the cash’ or continue to play it safe?  The reality is that, not surprisingly, the issue is a bit more complex than that.

As a starting point, the present context makes it ever more critical for organisations to really understand how important pay is in the overall Employee Value Proposition (EVP) and how happy employees are with it. This means going beyond asking the ‘I’m paid fairly’ question from most engagement surveys and looking at the different elements that link pay to engagement.

The results may surprise you. In fact, you may not realise that making improvements to structures or processes can have a bigger impact on employees than just paying more. A recent QCG client project showed that much.

While on the topic of EVP, it is in times like these that organisations can greatly benefit from taking a step back, understanding what are the strengths of their ‘employee deal’ and having conversations with employees about pay against this backdrop. This will help you navigate choppy waters in the face of potential low confidence in business prospects and the prevailing political and economic uncertainty.

This is not about flaunting all the nice benefits you offer. This is about really showing what the company stands for, how that is reflected in reward and other areas of the EVP, and getting that across to employees. In doing so, employees will be able to consider decisions about pay in a wider context, thus potentially moderating elements of concern specifically related to pay.

And there will be, of course, a need to address employee expectations of pay progression and competitiveness, beyond compliance with legal requirements.

On this particular point it is always advisable to keep in mind that the thinking behind your decisions and how you position them can have as much an impact on employees, if not more, than the actual amount of a pay increase.

If your organisation can afford it, and especially if you have followed more of a conservative approach to pay increases in recent years, then this could be an opportune time to position pay increases close to inflation. What happens with the economy and business results next year is anyone’s guess, so providing a boost to pay now will be a welcome message and can buy you some breathing room for the future.

Now, in an environment with restrictions and uncertainties keeping organisations from following this approach, special attention needs to be placed on how you allocate the funds that you do have available and how you manage the message going out to employees.

Therefore be very clear about your priorities and how these sit against your EVP. Do you focus on rewarding key talent and high performers? How much emphasis do you place on improving pay for employees towards the bottom of pay ranges? To what extent is internal equity the main driver of pay decisions?

Then, make sure you communicate these decisions in no uncertain terms. Treat employees like adults. Do not ‘sugar coat’ difficult messages and focus instead on the wider context and the journey to provide a balanced picture. In short, tell it like it is.

It is a tricky one indeed, but if you play your cards right you should be able to come off the back of this pay review cycle in a better place.

Getting better value from your reward spend through the development of a compelling and properly communicated EVP will certainly strengthen your hand. And in times of high uncertainty like these, informing reward decisions with reliable data and insights will also go a long way.

If you need help thinking through these issues or implementing your decisions drop us a line.