IDR | 07 Mar 2019

Why pay progression really matters

The quarterly reports on the labour market outlook from the Chartered Institute of Personnel and Development tend to produce cautious projections on pay prospects. But the results of its latest survey of employers’ views are different. They show that basic pay expectations in the private sector have risen for the first time since 2012. The report says: ‘After more than six years at 2%, the median expected basic pay increase in the private sector has risen to 2.5%, which is the highest registered since tracking began in 2012.’ (This expectation happens to coincide with our current analysis of pay reviews – see next page.)

The more optimistic prognosis on pay is driven by heightened recruitment and retention issues. While overall labour demand looks to be still falling, according to the CIPD’s survey, certain key indicators suggest increased pressure on recruitment. In particular, 71% of employers report hard-to-fill vacancies, up from 64% last year. The report also points to a clear willingness by employers to spend money to tackle these issues. Of the private sector employers with recruitment problems, 66% have raised starting salaries, up from 56% in the previous quarter. The proportion with retention difficulties that say they are likely to raise salaries also rose, to 62%, up a little from 59%. As well as raising basic pay, there are other ways to improve recruitment and retention.

One is to improve career prospects by providing development and training. Another is to provide pay progression, not just in terms of potential promotion but also the possibility of pay growth within jobs, based on making an increased contribution or gaining new skills. This could have a positive effect on employees’ experience and on the organisation’s performance. IDR research for the Office for Manpower Economics on the incidence of training shows a clear deterioration in the immediate aftermath of the recession. Since then the situation has improved a little but more could be done. So-called ‘merit-based’ pay systems that in practice have meant ending meaningful pay progression for staff are also an issue, with studies showing negative impacts on engagement and morale resulting from such approaches.

Productivity

There may be costs to remedying the situation, but the benefits could be greater – especially to productivity, which was on an upward trend before the 2007 economic crisis but has since flat-lined. The CIPD report also deals with this. It highlights the difficulty of translating what seems like an abstract concept into everyday practical operations. But it points out that one way to do this would be by capitalising on the strong link between increased productivity and better people management. The CIPD report quotes a 2018 study of management practices and productivity from the Office for National Statistics, which found: ‘Among the four broad management practice categories, we find that practices relating to continuous improvement and employment management – such as those relating to promotions, performance reviews, training and managing underperformance – were most correlated with [improved] productivity.’ This suggests that providing pay progression and training alike could not just enhance employees’ experience of work but could also boost company-level productivity and the overall performance of the economy.