The UK economy is facing a once in a generation challenge, inflation has hit 10 per cent, energy costs (while capped) are double those of last year, mortgage rates are increasing dramatically. Many employees are feeling the squeeze and employers are under pressure to react. Although softening somewhat, we also still have a tight labour market with low unemployment and a high number of job vacancies meaning that attracting and retaining employees is still difficult. At the same time businesses are facing strong headwinds of increased costs of their own and a looming recession.
What should HR and Reward Professionals be thinking about?
Although this is a challenging period, it does provide an opportunity for employers to think creatively about how to support employees. Our view is that there are some tactical decisions that need to be made in the short term and some medium-term strategic decisions that organisations should also be thinking about to improve their position over the next difficult year and beyond.
Tactically, these are the short-term solutions you must consider
What level of salary increase to provide at the next pay increase cycle?
Inflation is at 10 per cent+ and the ONS shows growth in regular pay in August at 5.4 per cent, although this tends to lag CPI. KPMG ran a pulse study on the 26th October which showed the most common expected pay increase of 5 per cent from 38 per cent of participating companies, with 37% lower than this and 18% higher. This is in line with anecdotal conversations that we have had with clients and other surveys that have been published recently.
A number of companies have already applied out-of-scope blanket increases to all employees, this is something that KPMG have done, already and may be supplementing this with a further increase at normal pay review time. Some others preferred a targeted approach, whereby only certain groups of employees were eligible for an off-cycle increase – typically those on lower salaries, who are likely to be affected by the cost-of-living crisis the most.
Decisions on pay will depend upon a number of factors:
- cost pressures the company is under (what is affordable?)
- current market position (for those paying above market, is there a sufficient ‘buffer’?For those behind market, it might be the right time to catch up, provided it is feasible to do so financially)
It is important to note, however, that any salary increase will have a knock-on effect on other reward costs linked to base pay.
Should you make a one-off cost-of-living payment to help employees with short-term costs?
A few companies (e.g. Sky, HSBC, Airbus) have announced in the press that they are doing this. Most organisations going down this route have provided a flat rate payment across their employee population, effectively supporting proportionally more those on lower wages. KPMG’s recent pulse study reveals that ca. 20 per cent of [participating] companies have offered a one-off payment of this type to their employees. Some companies have scheduled the provision of such payments in several tranches over a period of months. While these one-off payments will not impact the cost of any other reward elements and the employees will likely be grateful, we anticipate that the positive impact on engagement may not last long. Another important consideration for employers looking into offering a one-off cost of living support payment is that this type of payment can potentially cause issues with universal credit for the employees that are eligible for it.
What else can you consider?
If you are constrained by the reward budget and cannot offer either a pay increase or a one-off payment, or even if you can, there are other options you should consider:
- Tax-efficient benefits. Benefits such as free meals (John Lewis and Sainsburys have offered this type of support), access to gyms, etc. come with low costs and without attracting any tax and national insurance contribution (subject to qualifying rules).
- Discounts - many retailers and service providers offer corporate discounts, e.g. supermarkets offering vouchers at a 5 per cent discount. These are low-cost and easy to set up, in fact, many organisations already have this either through their flexible benefits schemes or other providers such as childcare voucher providers. However, take-up can be low as employees may not be aware of this benefit. This approach may be particularly welcomed by lower-paid employees as it is likely to have minimal impact on universal credit as well.
- Financial well-being support, whether financial management coaching or discounted/ company loans. This is a relatively low-cost option but may put an additional financial burden on the company if loans are offered directly by the company.
- Communication re-launching or better communicating existing benefits. Things such as retailer discounts and company-subsidised meals could be easily overlooked but will provide important day-to-day support to employees.
From a more strategic perspective, in the medium term, you should be thinking about:
Do you have the reward basics in place?
- An effective job grade and pay structure to enable effective pay management at recruitment, annual salary review, promotion, etc. that helps to manage pay costs and facilitate equal pay. Without this pay, costs can spiral and we tend to see expensive and unequal ad-hoc arrangements springing up. Managing job and pay structures effectively will mean that an organisation will better control costs, manage equal pay risk and will be able to afford other, more targeted and engaging interventions when needed.
Are you (and your employees) getting a good return on investment for your reward spend?
Employee expectations have changed since the pandemic and if your approach hasn’t, it is likely that you will be spending on expensive benefits that are not necessarily valued. Some things to think about that will also potentially help with cost of living:
- Review overall package – what elements of your current package do employees really value?
- Flexibility - not only from the perspective of work location but also consider things like
· flexible payroll patterns (e.g. bi-weekly payment or flexible payment for earned salary). We have seen Halfords and Capita announce this type of flexibility
· flexible pension (i.e. allowing employees to take the employer pension contribution as cash in lieu as Deliotte have just announced that they are allowing employees to do), and
· flexible career progression choices.
There is a lot that companies can do to support, from simple low-cost support, such as discounts to significant pay increases, and should be considering all options. It is also important not just to focus on the short-term tactical issues but consider the medium to long-term position and putting themselves in a sustainable position going forward to enable the effective attraction and retention of talent.
If you would like to talk through how KPMG Reward Consulting team can support you with any aspect of employee reward, please get in touch with Scott Cullen.