Pay in a Recession: How to grow in-built Resilience

Whether the current economic climate is confirmed as a recession or not, there is no question that we are in the middle of a cost-of-living crisis. According to Resolution Foundation, a typical disposable income for a working-age household is on track to fall by 3% this financial year, and by 4% in the year to April 2024, worse than the last financial crisis. The figures vary but the key message is the same: employees are going to feel worse off in real terms.

Very few organisations will find inflation-busting pay increases, so what is the answer?

Building Pay Resilience

1. Understand your ‘Pay Place’ in the market

• Know the going rate for your employee roles and how you align with the market
• Understand what other companies are doing to keep pace with change
• Position your pay stance as competitive
• Do not be in the 0-25 percentile or you will always be playing catch up
• Predict National Living Wage increases and try to maintain a healthy differential
• Sign up for London living wage

2. Enable pay progression

• Create a framework to enable employees to progress their pay
• This can be aligned to performance, competence or both – ensuring measures and assessment ensure return on investment.

3. Assess discretionary promotions

• Are these promotions simply a way to achieve a higher salary?
• Are salary increases via promotion being given for the right reasons?
• Is the decision-making fair and consistent?

4. Review other ad hoc pay increases

• Why did they happen, who received them and why?
• How much did it cost the business, and could that money be better spent?
• Incorporating this spend into a pay review budget is fairer ad provides a better return on investment

5. Make sure pay is targeted and fair

• Prioritise pay adjustments to address low pay against the market, market premiums, flight risks and the lowest pay
• Monitor your pay approach to mitigate equal pay claims
• Put a strategy in place to improve your gender and ethnicity pay gap.

6. Protect the lowest paid

• Guard against cost-of-living payments affecting universal credit and other benefits
• Tailor the timing and delivery of any extra money to the individual’s need.

7. Protect the higher earners

Be mindful of the significant tax implications when a pay rise tips higher earners over £100,000 a year. In real terms, for a single parent with three children, earning £1 more than £99,999 in salary could cost over £14,000 in lost tax allowances and childcare. Money they could potentially keep by opting instead for salary sacrifice schemes or enhanced pension.

• Single parent earning £100,000 loses £2,000 tax-free childcare per child = £6,000
• Government-funded term time childcare reduced from 30 to 15 hours = £7,952 cost*
• £12,570 tax-free personal allowance tapered away at a rate of £1 for every £2 earned between £100,000 and £125,140
• National Insurance rise of 2%
• Potential student loan repayments at 9%

*Analysis by AJ Bell based on the hourly childcare rate for outer London(Coram Childcare report)

8. Explore business efficiencies

Fix the leak in the bucket - are there efficiencies you have put off but which you could now put into practice, freeing up cash to raise base pay across the board?

Reset the clock on pay review - In terms of pay review and timings, some companies are drawing down against savings or tightening their belt to give staff increases earlier than planned. Is that an option?

Building a Total Employee Value Proposition

When your pay budget can only stretch so far, consider a broad spectrum of other options available to engage and retain your workforce. This includes core benefits but extends to many other ways to offer flexibility.

1. Salary sacrifice & other schemes

Consider enabling employees to either take cash instead of benefits, such as generous employer pension contribution (over and above auto-enrolment) or allow salary sacrifice into pensions. Look into car and bike schemes, which can also score high on your ESG metrics.

Technology and household goods purchase schemes enable employees to purchase and pay for goods directly out of their pay packet. Choose a supplier that covers technology, media, and gym equipment but also white goods, which are useful in the event their washing machine breaks down

In addition to Medical and Health insurance look at dental and health cash plans including eye tests, making everyday essentials easier and cheaper.

2. Flexible working

The big non-monetary benefit of our time is flexible working and the mutual trust that comes with it. ‘Flexible’ or ‘hybrid’ in one form or another are here to stay and are expected by most employees, but to make it genuinely effective you need to be clear about what ‘flexible working’ means.

Flexible working is not the same as remote working. Flexible working broadly encompasses a willingness to accommodate workers fulfilling their hours in a variety of ways, suitable for them and the business. Depending on the nature of the business, some workers may retain core hours they need to work, while for others flexible working will mean getting the job done however and whenever they choose. In sectors like nursing and care, where employees are needed on site, flexible working can still be enabled by tweaking shift patterns and rotas and enabling workers to drop hours or pick up more.

Further flexible arrangements enabling staff to save on travel costs can also make a huge difference, as can on-site facilities such as childcare. Ask your people what they want and what they'd benefit from and often they will lead you to a viable solution.

3. The Gift of Time

Studies show that the productivity gained from rewarding good work with a few extra days off can go far beyond monetary benefit. In theory giving additional time off is cost-neutral to a company because you're still paying the employee, whether they are working or not.

Workers can also be given the chance to buy or sell holiday days or have more flexibility around lieu days. Length of service awards recognising years spent in a company can work well, and a sensitive approach to compassionate leave builds loyalty. A day off to recognise a birthday or a company’s birthday can add a personal touch. All these things can help keep employees loyal and engaged.

Manager time is should never be underestimated and 10 minutes with a line manager can be beneficial on both sides. From an employee’s perspective, it can improve understanding of their role and where it sits within the company, leading to greater job satisfaction and productivity. From a manager’s perspective, it can keep lines of communication strong and enable improved recognition (see below).

4. Support and Protection

Especially during a cost-of-living crisis, raising awareness of financial well-being support and protection can be free, and money management sessions and debt advice can be simple and affordable for companies but a crucial added benefit for struggling employees. Access to confidential financial advice may be something lower-paid staff would never consider and for those suffering from financial hardship and debt, you could also offer interest-free loans, debt advice and counseling.

All workers appreciate some form of recognition, whether it’s a quiet ‘thank you’, an email to say that their hard work is appreciated or a £10 coffee voucher. Research shows that recognition from peers and line managers can lead to greater job satisfaction and buy-in, especially when adopting a more tailored, personal touch. Schemes and initiatives to suit any budget or business size can be pulled together in one place via clever new HR Tech, for example, the HAPI App

5. Personal Development

Personal Professional Development is not only relevant early on in people’s careers but also for workers who feel stuck mid-career. The opportunity to access it can be a huge enticement and it can often open longer-term opportunities to move across or up within the business, help with retention. It also carries a mutual benefit: while PPD engages employees because they feel like they're growing and learning, it also shows a company where staff can cross-pollenate and not stay siloed and stagnant. Explore your apprenticeship levy and how you can use it to support the development of staff.

In addition to Professional Development, many companies have embraced the concept of Personal Development. Examples might include volunteering days for charity projects or causes that staff feel passionate about. ‘Wellbeing hours’ can work well, giving employees one of their 37 contracted working hours for exercise, volunteering or wellbeing.

6. Think Compassionate

In these tough times offering paid leave for those with caring responsibilities could make a huge difference, if affordable. Targeted pay increases, grants or one-off payments for lower-paid staff will support those in need, but be sure to take into consideration any impact on universal credit.

7. Accentuate your Perks

If you offer free parking, spell it out. If there is free tea and coffee in the office, or a communal space where staff can spend downtime and have their lunch, position it as a perk. These so-called ‘small perks’ may be around the fringes, but they can add up to a lot and mean a lot. Communicate about them, though, or they’ll either be taken for granted or go unused.

8. Communicate with Total Reward Statements

An employee will never grasp the value of their total reward package unless their employer spells it out for them with Total Reward Statements. New recruits are likely to be the most engaged by their total reward as it will have formed part of their induction, but Total Reward Statements aid retention because they help remind employees that they have a benefit that is worth quite a lot on the high street, that they may have forgotten – it also pushes up benefits usage.