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What AREN’T pay increase figures telling you?

by Peter Fairchild.

We are living in times of pay constraint. Budgets are tight, inflation is high, and the public sector in particular have felt the cold snap of the austerity period since the global recession in 2008.

These trends are well publicised:

  • The UK inflation figure is currently 3.1%, the highest level since 2012;
  • The public sector pay cap of 1% has been in place since the turn of the decade (although this may be changing soon);
  • Average weekly wages are growing at 2.2%.

Similarly, participants across our sector surveys have also reported tight pay budgets, with median budgeted increases in 2017 ranging from 1.5% – 2.5%, and estimated 2018 increases ranging from 1.0% – 3.2%. This makes very difficult for organisations to retain key employees via base pay increases, and so more pressure is put on articulating and marketing the wider employee value proposition.

But what if pay budgets do not reflect the increases which are actually being awarded to employees? What if it turns out that actual salary movements are higher than inflation? What if pay budgets communicated at the top of organisations differ from what the reality is in the front line?

Evidence from our pay surveys suggest this may just be the case. When actual base pay movements are analysed using the same employees matched to the role as for the previous year’s survey, they are 0.7% – 3.1% higher than what organisations stated their budget was in 2017. At the most extreme end of the scale, one of our pay surveys has an average median budget of 2.5% for 2017, however incumbents have actually received an average salary increase of 5.6% – over double what is in the pay budget, and almost double that of inflation!

This leads onto several key questions to consider when taking pay budgets into account:

  • Are decisions outside of the pay review cycle, or broader salary policy having a material impact on same incumbent movements?
  • Are employers finally gripping the productivity conundrum, and using savings to increase some individuals’ pay outside of the budget?
  • Is the perception at the top of the organisation different from the reality?

These differences between budgeted increases and same incumbent movements can be an indication of deeper problems with the pay structure. Being able to analyse and find these differences can provide an indication of fault lines in the pay structure of an organisation, and help you make informed decisions about pay systems and processes.

This isn’t only important for the present, but is important for the near future. The impact that Brexit will have on supply of skilled workers and wages will sharpen the focus on what is really going on with pay movements.

Don’t just rely on pay budget information – dig deeper and make sure you find out whether your pay structure is fit for purpose to support your business requirements.

If you need help with this analysis or assessing your pay structure, get in touch.