How sustainable are employers’ pay strategies?

According to Wagestream’s The state of financial wellbeing: the cost of living report 2022, published in July 2022, there has been an upswing in organisations adjusting their benefits budget to support broader financial wellbeing programmes as an additional way of helping their workforce, rising from 51% in 2021 to 93% in 2022.

This is likely the result of employers wanting to support their staff through the rising cost of living, with the aftershocks of the Covid-19 pandemic, the war in Ukraine and high energy prices continuing to drive high inflation and interest rates, which impact household spending and business costs.

How pay has been affected and its future

Pay levels can be affected by a number of factors. These include the level of talent supply and demand, the number of organisations increasing headcount, unemployment levels, affordability of additional pay costs if the year ahead looks unstable, inflation, which has solidly risen since 2022, and industrial action, of which there has been much over the last few months.

The Chartered Institute of Personnel and Development’s (CIPD) Labour market outlook: Autumn 2022, published in November 2022, predicted average basic pay awards of around 5% in the private sector and 3% in the public sector in the coming year. Samantha Gee, director of pay and reward consultancy Verditer Consulting, says: “Although still relatively high compared to previous years, this is significantly below current levels of inflation, meaning a pay decrease in real terms for many.

“It will be interesting to see how the year ahead plays out with employers and government looking to show restraint in the face of an economic slowdown, being faced with increasing unrest and industrial action among workers.”

The current outlook is for the economy to contract even further over the winter, with the UK predicted to be in recession for much of 2023, says Emily Trant, head of impact and inclusion at Wagestream. “While employers are doing what they can to offer pay rises, there is a ceiling on these, particularly during difficult economic times, so pay levels will likely stagnate across many sectors,” she says. “Due to this, I would expect to see a continued increase in [employers] offering alternative forms of financial wellbeing support over the coming months.”

Pay strategy changes

Many employers have responded to the current cost-of-living crisis through pay rises, one-off bonus payments, updating and better communicating employee benefits, and enhancing financial wellbeing initiatives. However, unless these are underpinned by a clear rationale and align to a well-thought through reward strategy, they are at risk of being unsustainable in the long-term.

Knee-jerk reactions to support employees, or match what competitors are doing, can damage fairness, affordability and transparency, and cause problems in the long-term, says Gee. “For many employers, this will mean updating their reward strategy to ensure it is agile enough to respond to challenges such as high inflation and recession,” she says. “For example, they may want to be clear on their overall pay stance and set budgets with reference to pay benchmarking data and affordability rather than just inflation, and set goals such as achieving pay levels for lower earners that provide sufficient head room to maintain a reasonable standard of living in times of high inflation, without having to rely on one-off initiatives.”

Employees who have been in receipt of a one-off payment may be asking what they can expect in 2023. Alongside these and pay rises, employers may want to consider investing in a long-term strategy to support the financial wellbeing of their employees.

While gestures such as one-off payments are helpful for employees in the current circumstances, initiatives like these are a quick fix to what is likely a long-term problem, explains Stacey Lowman, head of employee wellbeing at Claro Wellbeing. “Providing some form of financial education will ensure that these efforts are more effective, as employees will be able to make the most of their pay rise or payment and enhance their money management skills. Payments would be more effective if spread over time, rather than paid in one lump sum to help them to spread out costs, budget and deal with the ongoing impact of the cost-of-living crisis.”

Sustainability in the long-term

The long-term sustainability of pay strategies will vary depending on financial situations and how the current economic pressures impact employers. Offering continuous pay rises and frequent one-off payments is not commercially viable for all organisations during challenging economic times.

Broader financial wellbeing packages, which offer flexible pay, subsidised products and services and access to financial advice, are likely to be a more sustainable means of offering support, says Trant. “Employers should be aware that language such as ‘emergency use’ or ‘crisis’ can amplify money stigma and make people feel bad about accessing benefits and support, whereas language about flexibility, choice and control can be far more empowering. Making sure staff are aware of and utilising the support available to them will increase the value and sustainability of these benefits.”

Record high inflation in the UK is resulting in some organisations increasing pay levels in an attempt to keep up. However, increasing pay in line with inflation is not a feasible option for every employer.

The war to attract and retain talent is also influencing pay levels, as employees have increasing choice of where to work, meaning that their pay expectations are rising, says Lowman. “Over the next few months, inflation could rise again if it is yet to reach the peak. This means that salaries will fall further behind. January is also historically the most popular month for staff to seek a new job, which could accelerate pay levels as businesses compete for talent.”

Workplace support

While benefits such as discount schemes, help with financial planning and salary sacrifice arrangements can all be a means of support for employers to offer, they could also implement easy access pay. This allows employees to access a percentage of their salary before their set pay day.

While this can be a useful tool to some employees at certain points in their lives, Lowman believes that it is not a sustainable means of support. “Workers may become dependent on these schemes to make ends meet, finding themselves in a cycle of fees and short of money ahead of the next pay day,” she says.

It is important schemes like this are explained properly to staff so they understand the true cost of what they may have access to. Jonathan Watts-Lay, director at Wealth at Work, explains: “These types of schemes normally come with a charge, so while they can be helpful as a one off, they are not such a good idea if they become the norm to pay for usual weekly or monthly expenditure.”

Employers can also offer support to employees by enabling them to better understand their pay and ensure it is optimised for their financial situation. Wage advances in emergencies, signposting to good sources of financial advice and sources of responsible lending if needed, can help with this, says Simon Bocca, chief executive officer of PayCaptain. “[Employers] could also proactively help employees to make sure they are on the correct tax code, supporting them to check their entitlement to state benefits, ensuring they are embracing pension scheme benefits and that they have an understanding of their retirement income.”

With the cost-of-living crisis hitting many hard, supporting employees in building their financial resilience and improving their financial wellbeing is of utmost importance right now. Employers should look to deliver financial education and guidance in their workplace pay strategies if they cannot afford to offer a pay rise, or do not think it is a long-term sustainable approach, in order to help staff during difficult economic times.