Adam Bernstein discusses the thorny issue of pay rises in the current economic climate
The world is in economic meltdown. Materials and products are in short supply, labour is at a premium – if it can be found – and energy is crucifyingly expensive. And to complete the perfect storm, interest rates are rising – albeit from an all-time low – to combat inflation and as a result of the Government’s recent ‘mini-budget.’
It’s easy, therefore, to see why employees are seeking not just a pay rise, but an inflation-busting pay rise; many are struggling to feed their families, fuel their cars and heat their homes. So what can the sector do to square the circle and keep staff happy while still earning a return on investment?
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Lucy Gordon, a director at Walker Morris, understands employers and employees alike are feeling the squeeze at the moment. She thinks the response to demands will depend on where employers are at in their usual pay review cycle, the industry in which they operate and the extent of the competition. “Most employees,” she says, “expect an annual pay increase at least in-line with inflation, which is currently running at its highest rate in 40 years. So, it’s entirely understandable that employers can’t afford to be offering 9 or 10% pay increases at the moment, particularly given that employers face national insurance contributions on top.”
As an average, she’s seeing awards in the region of 4-5%; this means in practice that employees are effectively earning less. But the problem of pay is compounded by what Charles Cotton, a reward and performance adviser for the Chartered Institute of Personnel & Development, describes as “a tight labour market where employees can easily change jobs to earn more.” For him, the issue is that “if a firm can’t increase pay by enough, then there’s the danger it will lose staff and find it hard to recruit new workers.”
And to drive the point home, Cotton cites data from the Office for National Statistics’ ‘Average weekly earnings in Great Britain: June 2022’ report which found that regular pay (excluding bonuses) grew by 4.2% between February and April 2022 – with variations by sector. To him, this means that “employers need to know what pay increases other organisations in their industry and location are offering so that stay competitive.”
Setting pay
When setting pay, the first thing to understand is that there is no legal right to a pay rise unless it is stipulated in the employee’s contract; logic, however, demands that pay rises should be based on employee performance, employee behaviour, workload and commitment. But there are benefits in rewarding staff with a pay rise – it can improve productivity and retention rates and will help with mental well-being as it reduces financial stress outside of work. It also shows that hard work doesn’t go unnoticed.
But how pay is set depends on the business as there is no standard to adhere to. Cotton sees that in some parts of the economy, pay is determined through negotiations with unions, in other parts its set by independent pay review bodies, while minimum hourly pay is set by the Low Pay Commission. Specifically for the private sector, he says that pay increases are often determined “by HR teams taking into consideration affordability, employee performance, future business plans, inflation, and staff turnover.” However, he recommends employers be as open and transparent as possible about the pay process and outcomes because “staff will be more likely to see the decisions as fair if they understand the reasons for what’s being offered and why.”
Gordon sees a similar pattern – that pay is rarely negotiated with employees and is usually determined by the managing director in smaller businesses, and by remuneration committees in larger businesses and PLCs. She tells how “remuneration committees have the job of benchmarking pay both externally, in the market, and internally, between staff operating at the same levels.”
And in unionised industries, Gordon sees pay negotiated between the employer and the union, and “this is why we are seeing a return to strike action when these negotiations are not successful… employees are facing a crippling cost of living crisis and the unions are trying to secure the best deals they can.”
But whichever tack is taken, best practice means giving an opportunity for an employee to present their case as to why they believe they deserve a pay rise, and then it is up to the company to consider. Often, pay rises may be based on a percentage – if stated in employment documents such as contracts and handbooks, or on what the company feels they have earned.
A question of productivity?
One solution to the problem of pay is to link pay rises to productivity or some other deal that gives both sides something. Gordon likes this as an idea, whether that be piecework or linking salary increases to team or company performance, as it’s already used in some sectors. “However,” she says, “at the moment, even when businesses are out-performing their previous results, it may still be difficult to give substantial pay rises, given that recession is likely to be looming.”
Cotton agrees with some form of linkage, saying that “if a firm is successful, and individuals and teams perform as expected, then there should be money to pay out to staff.” He adds that the advantage of this is that because the bonus isn’t consolidated into wages, it doesn’t permanently inflate the pay bill.
There is another option for Cotton – giving employees shares in the business “so that if the firm becomes more valuable, then the success is shared with staff.” And to this he adds non-financial offerings, such as linking increased productivity to extra paid leave, increased pension contributions, or other staff benefits. Gordon too looks to non-salary incentives such as salary sacrifice “that can present real advantages for employers and employees” by offering a tax and NI efficient way of purchasing items such as bikes and cars and making pension contributions. In her view this may be a better option for employers than a pure pay increase, but it’s not suitable for all as employers must think about what happens if an employee leaves part-way through the repayment term. Also, salary sacrifice can’t reduce pay to below national minimum wage levels.
Gordon thinks that employers do need to be inventive about what they can offer to staff to ease the strain on income, but which costs them less too. She says that “we’re seeing some really novel ideas that tick other boxes as well, such as corporate discounts on energy-saving devices, electric cars and solar panels for home offices.”
Overtime as a solution
Could working overtime be a solution? Possibly, but Gordon would suggest that employers and employees check contracts first. “Overtime,” she says, “is usually offered by an employer, and depending on the contract, the employee might be compelled to work it or might be able to decline the offer.” While the law demands that employees receive at least the national minimum wage on average for all hours worked or treated as worked, overtime can be a good solution if employers have work available, but as Gordon says, “for businesses experiencing a reduction in work following the pandemic, this might not always be an option.”
Amit Sen, a senior business manager at Acas, takes a legal line and says that where employers choose to offer overtime or to offer pay for overtime, “details must be clearly stated in individuals’ written statement of employment particulars and any accompanying guidance.” Employers must monitor and record any additional hours to make sure they abide by the Working Time Regulations to minimise any potential negative effects on health and safety. The regulations state that employees cannot be forced to work more than an average of 48 hours in an average of 17 weeks if they are over 18 – different rules apply for those under 18. Employees can opt out of this limit.
Employee well-being is also a concern for Cotton too. He says that “while working more hours can help in the short term, in the medium and longer-term it can cause mental and physical health problems and result in a drop in productivity.” He reckons that instead of working harder, “HR teams should be looking at how employees can work smarter, such as through improving the design of jobs and work tasks.”
But if overtime is the answer employers must detail the type of overtime practised within the business, the conditions and remuneration in the employee’s employment contract, and if overtime is required. And to avoid discrimination claims, overtime should be offered to all employees, and you cannot stop other employees from working overtime and allowing others to.
Threats made
Even with the best will in the world negotiations may fail and offers be rejected. So, how should employers react if employees are upset with the response to a pay rise request and threaten either work to rule or strike action? In some cases, employers will have to rethink and potentially roll over and pay.
But if it comes to it, strikes and ‘work to rule’ will cause disruption to a business and can affect supply chains, which may lead to an employer then breaching the terms of its contracts with customers. For Gordon there is more to worry about: “Employee relations issues can also expose the business to negative publicity – consider the RMT’s successful balloting for industrial action by rail workers.”
Where collective bargaining agreements are in place, Gordon cautions employers to make sure they are followed and fully exhausted in order to try to avoid industrial action. However, she says that “it may not be possible to avoid industrial action altogether. How such action should be handled depends on whether the action is lawful (authorised and endorsed by a union) or unlawful (where employees take matters into their own hands).”
Sen warns that this area of employment is extremely complex and bound up with contract law. He says that in terms of strike action, “the first thing is that any action has to be in contemplation or furtherance of a ‘trade dispute’ as defined in s.244 of the Trade Union and Labour Relations (Consolidation) Act 1992.” Sen adds that “failure to comply with the law, means that legal protections against dismissal, detriment, and victimisation would not apply.”
If the rules are followed the union will be immune from liability for any losses incurred by an employer as a result of the industrial action. In contrast, any unilateral action by employees that is neither official nor lawful is likely to lead to individual disciplinary action which could potentially result in dismissal without notice for unauthorised absence. And where action is shown to be unlawful, it’s possible to obtain a court order to prevent an unlawful strike.
In relation to a refusal to work overtime, action can only be taken if it’s clear in the contract of employment that the working of reasonable levels of overtime is a contractual requirement. However, while informal warnings and attempts at resolution are always advisable before any formal action, unofficial overtime bans often fizzle out as usually employees are keen to work overtime at higher rates of pay.
Threats aside, industrial action may be a possibility and so wise employers contingency plan with a view to re-deploying non-striking employees from other parts of a business based in other locations.
Unrest can lead to a non-unionised workforce seeking to become unionised. In this situation, Gordon advises employers to consider “placating staff by agreeing to an informal request for voluntary recognition which might give the employer more scope to determine the remit of the union.” And from Sen’s standpoint, it is not uncommon for unions to seek to recruit members with a view to eventually gaining voluntary or statutory recognition and the bargaining rights that flow from that. He says, though, that unions can be a force for good, but that “depends on the relationships between the recognised union and the employer, as well as the relations between the union and its members.”
Sight shouldn’t be lost on the fact that union officials often have a good handle on what pay rates and pay rises have been achieved in similar companies and can advise their members what is going on outside their company ‘bubble.’ In other words, union officials can explain the bigger picture to disaffected employees and also discuss possible cost reduction measures with an employer that the union can put to its members to make any increase affordable; and they can condition expectations to a realistic level to some extent by explaining the fact that companies are suffering, and some have become insolvent due to their cost base, including pay, being too high.
Of course, it’s better to avoid conflict in the first place which is why Cotton advises employers “to go to arbitration to resolve any pay disputes… though that would also depend on employees being prepared to go through the process as well.”
Conclusion
The issue of pay is perennial, and it’s exacerbated by the internet making comparisons and job hunting easier, and the exigencies of markedly higher inflation and squeezed family budgets. Of course, employers are in the same position. But for the moment at least, employees appear to have the whip hand. If pay demands cannot be met, employers need to be creative in offering low cost but valuable alternatives.
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