With inflation on the rise and candidates in short supply, pay is creeping up. But how long can this go on for, and have employers’ payroll budgets grown as much as research suggests? Ashleigh Webber reports on what’s driving the current pay trends.
Reports of organisations offering astronomical starting salaries this year might have set employers’ hearts racing over the past couple of weeks. After all, we’re still emerging from the pandemic that saw £80.37bn paid out in government business loans, causing business costs to accelerate.
Recruitment consultancy Robert Walters has claimed payroll budgets in the professional services sector have leapt by 10-15%, the largest increase seen since 2008, while reward specialist Willis Towers Watson has placed the average anticipated pay rise budget at 3.2% – both staggering increases considering pay settlements averaged 2% in 2021 and not much in the way of pay rises was seen at all in 2020.
Traditionally, organisations have tried to match inflation in their annual pay settlements, but with the consumer price index currently at 5.1% – with the Bank of England predicting it to rise to around 6% by the spring – many will be questioning whether this practice is realistic.
What is really going on with pay at the moment? Do the headlines around pay last week suggest an optimism from employers that might not translate into action once they have factored in inflation, rising energy costs and the forthcoming increases to employers’ national insurance bills?
For Steve Herbert, head of benefits strategy at Howden Employee Benefits & Wellbeing, claims of big pay increases in 2022 are overblown.
“Many organisations just aren’t in a position to do so. It doesn’t mean they won’t in the long term, but they’re certainly not in a position to pay out top dollar right now,” he says.
“We’ve got employers that have had a couple of years where they have been below their profit targets and budgets, lower productivity, and below where they expected because of the pandemic. Many have been landed with lots of debts and loans they had to take out just to survive; and in April they are facing a significant employment tax increase.”
Although many employers would like to be in a position to offer pay rises that won’t automatically be swallowed up by the rising cost of living, the idea that inflation-matched pay settlements are commonplace is a myth. Voucher codes company Savoo recently suggested that employees would now be earning £25,400 more per year on average if salaries had increased in line with inflation annually from 1987.
Sheila Attwood, pay and benefits editor at XpertHR, says that most firms consider the cost of living when looking at pay, and acknowledges that it has caused pay to creep up, but suggests that any employees who expect a 5.1% increase will be disappointed.
“This year in particular reward professionals are not going to be in a position to match inflation, but they are going to be mindful of the fact that the cost of living is going up astronomically and that pay awards are going to have to go some way towards matching that,” she says.
“It’s right that employers should look to make a fair pay increase, and a fair pay increase this year is more than they paid last year. It won’t reach inflation, but it will probably push those boundaries if they’re looking to make a fair deal.”
Organisations will be forced to act on pay if they want to retain key staff – especially if employees know that they’re in a good bargaining position if they consider taking a job elsewhere.
Tim Kellett, managing director at reward management consultancy Paydata, expects pay rises to average out at 3-3.5% this year, but many firms will be targeting generous awards at roles where candidate supply is limited.
Paydata’s UK reward survey of 180 organisations in Autumn 2021 found that 39% are going to focus their pay increases at their most scarce resources.
“People are moving on in order to see their pay increase, often seeing a 5-10% increase in pay in some sectors,” says Kellett. “In IT and digital roles this premium is even higher.”
He indicates that some organisations will be forced to make out-of-cycle pay increases if they feel they are at risk of losing staff with key skills.
“Organisations are being held to ransom by employees who have found a new role elsewhere offering more money, and are requesting that their employer increases their pay to keep them on board,” Kellett notes.
According to Robert Walters, starting pay in professional services roles have leapt by up to 15%, driven by demand for candidates and skills. This is putting pressure on firms to improve remuneration for existing staff.
Organisations are being held to ransom by employees who have found a new role elsewhere offering more money, and are requesting that their employer increases their pay to keep them on board” – Tim Kellett, Paydata
Job board CV-Library found that average salary had increased in 16 employment sectors. The average marketing sector salary in January 2022 is 12% higher than in January 2021, and average salaries in IT (11.6%) and administration (10.3%) roles have also crept up.
“Employers are in a difficult spot. Retaining staff is about a lot of different factors, but money can be a powerful lever. So to try to fend off competition, many employers are ramping up financial incentives, and ramping up salaries,” said David Leithead, chief operating officer at professional services recruitment firm Morgan McKinley.
Some employers are going to greater lengths than others to entice candidates, such as retention bonuses to reward staff for accepting a role and staying with them.
“Getting a salary increase is a natural headline reason for moving, and right now talented people know there is particularly strong demand for them and that moving jobs should and will result in an uplift,” says Leithead.
However, Attwood offers caution over increasing starting salaries too much, stating that organisations should not forget about their loyal staff.
Fewer pay freezes
Not all sectors are seeing pay rise at these astronomical rates – particularly when starting salaries are taken out of the equation. Attwood says that 2.5% is a much more realistic median for January based on the private sector pay settlement data XpertHR has collected so far.
She says that far fewer organisations will freeze pay this year, compared with 2021, with most pay deals falling between 2.5% and 4% at the moment.
Unions were sensible over the pandemic and didn’t push for high increases, but there’s going to be pressure from them this year and that’s going to push some deals to the higher end of the range” – Sheila Attwood, XpertHR
“There are some good deals out there being negotiated by the trade unions, and we are seeing the restart of some industrial action around pay and conditions,” Attwood says.
“Unions were sensible over the pandemic and didn’t push for high increases, but there’s going to be pressure from them this year and that’s going to push some deals to the higher end of the range.
“Organisations have tried to look after employees over the pandemic and the employee voice has come forward more. I think that organisations are trying to react to what employees want in order to have an engaged, productive workforce.”
Reconfigure your benefits
Where the purse strings remain tight, Howden’s Steve Herbert offers some tips for organisations that want to reward their loyal employees and attract new talent.
They should consider whether their existing benefits reflect what their workforce wants. Anything that is no longer needed could be removed to help fund perks that may be more beneficial – for example, passes for a gym near the office will not be much use if the majority of staff work remotely.
Benefits and flexibility
They should also watch out for duplication of benefits – for example, a life assurance scheme or private medical policy may both include employee assistance programme or remote GP appointments.
For organisations that cannot afford large pay increases, Herbert says financial education might be a worthwhile benefit to offer and could help some employees make their wages go further.
“If you give someone a 2% pay rise, by the time tax and national insurance is taken out of it they don’t get very much, but it still costs the employer a lot of money across the entire payroll,” he says. “If you can fund a good financial wellbeing programme, it could make a massive difference to some employees’ spending – much more than a 2% pay rise would have done.”
Total reward package
Money is not the only reward valued by employees; Leithead notes that employees will consider career opportunities, skills development and flexible or hybrid working options when deciding where to work.
“Is learning and development a priority? Are people clear on the vision for their career development? How’s the office culture? Innovation here is about re-thinking the office culture, being radical, being brave to implement real changes, driven by the employees for the employees,” he says.
Ultimately, Herbert believes that flexibility will continue to be prioritised by employees over salary this year.
“A huge slice of the employment sector in the UK has spent two years through a lived experiment of working from home,” he says. “Recruiters have told me that they have employers who are paying significantly over the market rate, but the candidates just aren’t taking it because the organisation expects them to go into the office. Those candidates are going for jobs with lower pay, but with more flexibility.”
Will salaries keep growing?
The real question is whether salaries will continue to grow, or whether this is a short-term blip, especially as the Bank of England expects the rate of inflation to fall quickly in the second half of 2022, and even further in 2023.
“Within different bandings of experience, and in different sectors and disciplines, there are ceilings of sorts on pay, so salaries don’t just keep growing, there is a line in the sand. We just haven’t got there yet in many markets,” Leithead says of starting salaries.
Kellett agrees that salaries will likely stabilise later in the year, particularly as organisations will focus on how they might reward staff in other ways.
“I think what we might see is organisations having a much greater focus on other elements of the reward package. A decade or so ago employers might’ve only reviewed their benefits every five years but now they need to constantly be reviewing their benefits to make sure they’re relevant and cater for different employees’ needs,” he says.
Attwood suggests the overall picture is likely to change in April, when public sector settlements are generally agreed and organisations will have a clearer idea of how they might be affected by the new energy price cap and the new rate of national insurance contributions.
However, with Totaljobs finding that 42% of workers are looking for a higher salary in their current job or a new one, organisations keeping a close eye on market rates may feel forced to consider how generous their reward packages really are.