The first quarter of the year provides the initial indications of the year ahead with January and April pay settlement announcements. With the majority of pay reviews concentrated in this early part of the year, alongside increases to the government’s minimum wage levels, it provides a clear steer for the year ahead. Drawing on our insights from across sectors from our clients, we have summarised the key lessons from this year’s pay reviews.
High pay awards were never a sustainable solution, but the talent battle remains. Pay award predictions and the early settlements in 2024 all point towards lower uplifts than in 2023. Whilst unsurprising given the affordability challenges for employers dealing with rising prices and supply chain difficulties, a decreasing pay pot reduces the flexibility for HR and Reward teams to target pay increases.
With inflation falling and the labour market loosening, it is likely that this downward trend in pay awards will continue into next year. The CIPD found that three quarters of employers did not think they would meet employee pay expectations in 2024. In this context, HR and reward teams will need to ensure that the smaller pay pots still deliver the intended aims of pay reviews or risk losing key talent.
Inflation is falling sharply, but a steady fall is not predicted. CPI was still tracking in double digits at 10.1% in March 2023, a little over 12 months later, prices are increasing at 3.2%. This downward trend was evident in the latter part of 2023 when many pay remits were being set. Whilst the downward trend would suggest cost of living pressures are easing, reducing the need for high-pay award budgets, there is caution in relying solely on these measures. Core inflation, which strips out elements volatile to price changes such as energy and food, was reduced by only 1 percentage point in the same 12-month period. Core CIPH currently stands at 4.7% and is reflective of the embedded price increases in a range of goods and services.
In its latest monetary report, the Bank of England is expecting inflation to fall towards its 2% target before rising in Q3/Q4 this year. Whilst the inflation rate is predicted to remain under 3% by the end of the year, the upward trajectory during pay remit setting for many will highlight the shifting picture of price changes in the economy with employers already reducing vacancies in attempt to reduce costs. The lesson for employers heading into the next pay round will be to shift focus away from single inflation measures to determine cost of living pressures.
Significant increases in the living wage are causing wage compression challenges. The focus on the lowest paid during a period of rising costs has been the right approach. The rising floor of pay for those at the lowest grade however is creating a challenge for some supervisory and skilled pay grades as the pay differential has been eroded during recent pay rounds. This wage compression puts pressure on companies to ensure that skills and competencies in these roles are recognised. The perceived inequity in pay, particularly when measured against the expectations across grades, raises pressure on how differentials will be kept. A tricky balance for employers to balance alongside affordability.
In some cases, recent pay awards have caused employers to consider changes to their pay structures. The post-pandemic pay challenges have increased the number of employers considering changes to their pay structure. Employers are looking to build in greater flexibility, with progression pathways, to provide more opportunities for pay increases. A key takeaway for HR and reward teams from this pay review round is to ensure that pay structures are still fit for purpose. For some, structural changes will be required before the next round of negotiations begin.
Executives want a bigger pay rise. There has been increasing discontent, particularly amongst larger firms, of the growing divide between US and UK executive pay. Whilst not a universal approach, a number of global companies have already significantly increased executive pay to close this gap.
Executive pay will continue to be under scrutiny from AGMs and wider stakeholders. Raising executive pay can not be done in isolation. A key lesson from this pay round is to ensure addressing executive pay doesn’t widen other gaps
- Pay Review
- Pay
