Wage rises and pay compression
 

In November 2022, the real Living Wage rates set by the Living Wage Foundation rose to £11.95 per hour in London (90p increase) and £10.90 per hour across the UK (£1 increase) – the largest year-on-year increases to date. This has led to a significant challenge for many employers, who saw the wage gap between employees on these rates and their line managers continue to shrink as a result of these rises pushing up the wage floor – i.e. pay compression.

This problem is particularly prevalent in certain sectors, such as the arts, culture and heritage sector, where pay differentials between frontline staff and their team leaders were already quite narrow to begin with.

From a reward and employee engagement angle, this “squeeze” at the bottom of the pay range has two main implications. Firstly, it can create a sense of perceived unfairness and give employees in the level above those on the living wage the impression that pay is not proportionate to the worth of their jobs, thus eroding employee motivation, trust and morale. Secondly, the fact that pay is not keeping pace with the increase in responsibility between levels of work diminishes the financial incentive for employees to move into these roles and take on more complex work or managerial responsibilities – essentially “doing more” for a relatively similar salary.

So, what can employers do to address this challenge?

Actionable ways to mitigate pay compression
 

One actionable step you can take is to restore the wage gap by establishing a fixed differential between the two levels of work, for example by introducing a minimum gap between average salaries across grades or levels of responsibility. This will ensure that, as minimum and living wage push up salaries, the pay relativities between roles will be maintained – with the caveat that this will require additional investment and increase your paybill cost year on year.

This may also, eventually, have a knock-on effect on pay rates for the next level up, thus increasing the risk of pay inflation.

If this option is not financially viable or sustainable for your organisation, consider rewarding your team leader roles using levers outside of base pay, such as bonus schemes, managerial allowances or performance-based top-ups (i.e., non-consolidated payments linked to the achievement of roles’ objectives). This can help motivate staff to progress into these jobs, even without a material increase in salary.  However, for these and other one-off payments to be effective, it is important they are significant and meaningful, to avoid the risk of employees perceiving them as tokens, rather than rewards or incentives.

There are also other strategies organisations can consider to address the lack of differentiation in pay between roles in more junior grades. These include:

• Enhancing your EVP for specific employee demographics. For example, line managers and supervisors may have a degree of flexibility in how and when they work, a benefit which frontline staff on the living wage may not be able to enjoy. Communicating the overall employee deal on offer at different levels (rather than pay alone), can help to distinguish and maintain differentials between roles in spite of any wage compression.
• Differentiating your benefits offering, for example by linking enhanced benefits provisions to grade thresholds. Although this may not be in line with general trends showing organisations moving towards greater equalization of benefits for all employees, it remains a valid option that can help achieve the right outcomes for employers.
• Providing additional avenues for growth and development as employees take on additional responsibilities. This can be achieved by offering robust development programmes, tailored training, mentoring or lateral development opportunities such as secondments to different functional areas within the organisation.
• “Flattening” your organisational structure, by removing the layer between entry level workers and middle managers, and creating self-governing teams – which can reinforce the message of autonomy and trust in employees.

Other factors to consider
 

Ultimately, there is no “one size fits all” approach to get this right – as is often the case in reward. Our advice would be to engage with your workforce in constructive ways (for example, by conducting focus groups) to find out what which aspects of work matter to them – whether it’s base salary, bonuses, benefits or other intangible aspects. This will help you identify what might work best for you. It is also important to remember that any action should be taken in light of other crucial factors such as affordability, and should also be consistent with your organisation’s overall values and reward principles.

Get in touch if you would like us to help you find the right solution for your organisation, via fathima.sahabdeen@qcg.co.uk.