IDR | 07 Jun 2018

It's time to think more strategically about pay

Pay growth looks to be picking up again, as shown by our own data on pay settlements, official figures on average earnings, and reports from the Bank of England’s agents. IDR’s monitoring indicates that the proportion of deals worth 3% or more is rising. Meanwhile, the underlying trend in average earnings growth also appears to be rising, despite weak economic growth affecting bonus payments. The Bank’s agents report that growth in total labour costs has edged up, reflecting slightly higher pay settlements than in 2017 along with greater employers’ pension contributions. This is not surprising, given the backdrop of rising inflation and a strong labour market. Inflation has been steadily rising over the past two years, and economists think it will remain on the upside in the coming year. The labour market remains robust, on the main measures at least. The CIPD’s latest report on labour market prospects points to a continued growth in demand for labour during 2018. Key to this is supply. The CIPD says: ‘The strong demand for labour is not being matched by labour supply, which has also been affected modestly by a relatively abrupt slowing in the growth rate of EU nationals coming to the UK over the last 12 months.’ Indeed the outlook here is set to deteriorate, the CIPD says. ‘Overall labour supply is expected to fall in the coming years, partly due to an increasing proportion of older workers, who tend to work fewer hours. At the same time, EU nationals tend to work longer hours than UK workers. Taking these two factors together, potential labour supply is projected to grow by less than the recent average, which may increase demand for workers.’ Raised demand for labour is likely to have an impact on pay, and the prospect of greater wage growth also provides an impetus for employers to start to think more strategically about pay. Leading reward expert Duncan Brown, of the Institute for Employment Studies, wrote recently: ‘I believe that we may be seeing major shifts…back towards more employee-centric approaches which emphasise pay fairness, rather than the very flexible and unregulated, wholly market- and performance-driven wage systems which have come to predominate…over the past 25 years.’

Fairness

Is he right about this? Certainly, the requirement to publish figures on the gender pay gap is likely to be a spur towards greater equality. And there may be more to come on this. But equality is not always the same as fairness. Indeed, one indicator of the extent to which this remains an issue is the fact that the debate about bonuses – and the ratios between salaries for executives and those for ‘ordinary’ workers – has not gone away. The need for pay to feel fair remains. And if pay pressures are rising it makes sense to be more strategic, rather than adopting ad-hoc solutions. Because different firms operate in different markets, there is no single solution and the issues can be complex and varied. But the initial step might involve a return to first principles. Companies need reward systems that support recruitment, retention and engagement of staff. They need to start by asking staff what engages them in their work, and also how the pay structure influences this, both negatively and positively. They can then begin to think more deeply and creatively about approaches that meet the needs of employers and employees alike.