How high inflation might affect reward strategies long-term

Businesses need to review their core principles and strategies around reward during the cost-of-living crisis

As disputes continue around pay nationwide, ongoing public sector strikes have been a notable barometer in a tempestuous year.

The ongoing impact of the cost-of-living crisis has been crippling for many workers in terms of their spending power. Companies in every sector have come under pressure to respond as employees seek higher salaries in a competitive recruitment market.

Latest ONS data indicates that employee earnings grew by 6.5% on an annual basis in the three months to April 2023 - by 6.7% in the private sector and 5.6% in the public sector – but even these figures are tracking considerably lower than inflation.

In response to this, companies are having to get creative. In some cases, efficiencies might be found to free up the cash to raise base pay across the board, or among groups that need it most.

In others, it may be possible to reset the clock on pay review, and either draw down against savings or tighten belts in other areas to increase pay earlier than planned.

Rather than focusing solely on pay, though, businesses should review their core principles and strategies around reward to put themselves in the best place possible to ride out the storm.

The importance of pay benchmarking

Rising inflation has been a key influence on many recent pay decisions but they cannot and should not be at the centre of those discussions.

Before taking inflation into account, companies need to challenge themselves and ask whether employees are earning the right salaries in the first place. If salaries are low, employees should potentially be receiving more than an inflationary increase. If they are already too high, no increase may be necessary at all, irrespective of the cost-of-living crisis and however unpalatable that may sound.

The best and fairest way to assess this is to perform a pay benchmarking exercise. By using a digital benchmarking solution such as PayLab, companies can gain a new understanding of their pay position and inform decision making around overspend or underspend with granular insight.

Armed with this level of data and understanding, companies can understand their true market position, move forward with confidence and even broach the area of salaries and payment with greater transparency.

The need for flexibility

The big non-monetary benefit of our time is flexible working and the mutual trust that comes with it. Never has it been so important in the rewards matrix. Flexible working can allow employees to fulfil their hours in a variety of ways.

For some it might mean retaining core hours, while others will be able to get the job done however and whenever they choose. In sectors like nursing and care, where employees are needed on site, flexible working can still be achieved by enabling employees to drop or pick up hours, or by tweaking shift patterns and rotas to save on high-cost areas like travel or childcare.

Companies are also being flexible with time in other ways that can pay immeasurably in staff morale and loyalty. Studies show how much productivity can rise by rewarding good work with extra time off, for example, while the gift of time might also translate into buying or selling holiday days or greater flexibility around time off in lieu or birthdays.

Last year’s four-day working week trial was compelling, with over 90% of the companies that took part choosing to extend it. Most workers involved in the trial said they would not want to go back to a five-day week, and most of the companies reported an uptick in productivity, lower absence and higher engagement levels.

Looking beyond standard benefits

While pay rises cannot currently keep pace with employee expectation, another area to focus on is benefits. Gone are the days when a pension scheme by itself was enough, and the opportunities are now far more diverse.

Activating employee discounts schemes through apps like HAPI can deliver genuine savings for workers on the weekly shop, high street brands and eating out. On electric vehicles, bike schemes, technology and household goods it can add flexibility and value while also scoring high on environmental, sustainability and governance.

As well as standard medical and health insurance, dental and health cash plans can make everyday essentials like eye tests and glasses easier and cheaper.

Careful analysis of employee demographics is often a useful starting point for realising a fully functional benefits package because it allows employers to better understand and gauge employee engagement.

Attendance of webinars on debt advice might appear underwhelming company-wide, for example, but may rank relatively high among lower-paid roles, while older workers might dominate the audience at a retirement workshop.

A strong benefits package should be able to cater for both ends of the spectrum, flexing to provide options for every individual as they plot their way through their career. Companies often worry that this means a complicated, expensive programme, but by taking the time to understand their workforce it can usually be achieved.

Also remember that an employee will never fully grasp the value of their package unless you spell it out for them with total reward statements. These aid retention because they remind employees how much a benefit is worth, while increasing use and appreciation.

Investment in people

Often overlooked but seldom undervalued, opportunities around personal and professional development allow employers to show themselves willing to invest in employees, grow their skills and ultimately say ‘stay with us’.

This may form part of a broader succession planning strategy for homegrown talent, which can also mitigate the difficulty and cost of recruitment. This far-sighted approach encourages longevity in employees because invariably the investment and engagement leads to them feeling trusted and valued, sentiments they are more likely to pass onto colleagues in a virtuous circle.