The cost of living and employee reward

With inflation peaking at 11.1% (CPI-ONS), a high employment rate, a record number of vacancies and a cost of living crisis, we saw organisations wrestling with the challenge of attracting and retaining employees during 2022.

In this turbulence a consistent theme emerged, with many employers opting for additional (and different) ways to support their employees.

Where possible, employers provided direct/immediate support in the form of additional pay reviews in the range of 3% to 5% (KPMG poll), cost of living payments and enhanced pay increases.

There were also some creative ways in which employers offered indirect support to employees, such as free meals, free transportation, added flexibility, retail discounts, financial coaching, and wellbeing support.

In a recent poll that KPMG conducted, 50% of the respondents offered a one-off cost of living payment followed by 44% who offered financial coaching/wellbeing.

Many commentators expect the UK to fall into a relatively shallow recession in 2023. The Bank of England expects inflation to drop to around 4% by the end of the year, but this will still mean relatively high inflation across the year and higher costs of living will still impact the spending power of many individuals. It remains to be seen if companies will provide similar support schemes this year.

It could be argued that last year set a precedent, and employees might have an expectation that employers will provide additional support. However, some employers have suggested that, while short-term financial support helps individuals better manage the crisis, it may lack long-term impact on employee engagement.

With inflation dropping and with a tougher economic outlook for employers, will as many opt for one off cost of living support payments as last year? There is also a significant increase in the National Living Wage this year, which employers will need to deal with. Given all this, it seems likely that there will be less of this type of support as there was last year. But it is also likely that employees will still feel the effects of inflation which outweighed average pay increases and, while dropping, continues to be high.

While the employment market is easing somewhat with some high profile lay-offs happening, there are still high levels of employment and, if demand picks up again later this year, attraction and retention is likely to be high on employers’ agendas.

Given this, it may be better for employers to do what they can in terms of pay increases for employees this year as this will help with; attraction, retention, engagement in the longer term (unlike a one-off payment), cost of living, and National Living Wage increases. It is important that, when doing this, organisations fully understand their current position e.g., giving big pay increases to employees that are already over-market is not sensible or financially sustainable.

It will also be important to focus on cost efficient actions like financial wellbeing & coaching, tie-ups with other companies for providing discounted goods and services, and free meals etc. This can differ by sectors/industries depending on magnitude of impact on disposable income (or spending power) of employees.

Providing more flexibility in the package could be critical, for instance allowing employees to opt out of certain (less valued) benefits in favour of cash or flexible working patterns allowing employees to save money – for instance on travel and childcare costs.

Employers should be transparent with employees about what they are and (more importantly) are not able to do.

It’s an opportunity for employers to review and optimise their Total Reward proposition with the aim of supporting employees in a sustainable manner – and also making their organisation a more attractive place to work in the longer-term.

Organisations need to make sure that the overall reward package is compelling. If you would like to understand more on how your total reward can be optimised to support the employee journey from ‘I quit’ to ‘I commit’ then please reach out to Scott Cullen.