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27 Oct 2022
by Elizabeth Howlett

What will awarding cost-of-living bonuses do to the economy?

REBA explores both sides of the coin in the great pay debate and asks the experts whether organisations should tread carefully with financial rewards during the cost-of-living crisis

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During the current economic crisis you would think the two sweetest words any employee can hear from their organisation are raise and bonus. And it’s very likely that they are, but is cost of living pressure a problem employers can solve with a one-off injection of cash?

Approximately 5% of businesses with 250 or more employees handed out bonuses to help employees through financial difficulties in the three months to August 2022, while only 1% of businesses with fewer than 250 employees did so. 

Meanwhile, the CIPD’s summer Labour Market Outlook for 2022 found that 15% of organisations have given, or are planning to give, such a payment to some or all of their workers, while a further 15% have the matter under review.

In August 2022, 12% of businesses said that employees’ average hourly rate had increased compared to the previous month. 

All eyes are now on reward professionals, who are likely feeling the pressure to respond in their own organisations, especially as the CIPD figures indicate that even if one organisation isn’t giving payments and pay rises, their competitors may be. 

Tightening up the recruitment market

Tim Brook, head of HR solutions at Equiniti (EQ) said that while there is no right or wrong way to tackle the problem, there are wider factors to consider. “Speaking to clients who have given a bonus, they really do have the sincerest intentions,” explains Brook. “They want to help and it is usually because they’ve made a profit and have the ability to help with money, but that leaves a lot of organisations that are still struggling from the pandemic unable to do that. That exacerbates an already difficult talent and recruitment market.” 

Brook points out that while many organisations have raised wages and there is no lack of vacancies, people may still struggle with money. The motivations to leave a job for another then become money-oriented and organisations that cannot compete with bonuses and salaries will find it harder. 

“I suspect that’s the motivation behind the Bank of England’s comments earlier in the year on raising pay. They may be worried about a lot of businesses being unable to compete with salary and going under,” he suggests. “The problem with bonuses is that they can seem like a decent amount of money, but it quickly gets overtaken by the recent rising cost of energy. Firms offering £1,000 bonus for example, once you take the tax out of the equation it’s unlikely to even cover two months’ worth of energy bills. It’s nothing.” 

However, Brook emphasises that ultimately protecting your employees is the number one priority, not the broader impact. “We have to make sure that people aren't either too cold or going hungry. The first priority surely has to be on people's lives rather than profit.” 

Two sides to every coin 

There are clearly some economic disadvantages to consider when giving one-off bonuses and pay rises, but there’s also the plain and simple fact that employees need more money, and financial (alongside general) wellbeing is of paramount importance. 

Charles Cotton, senior adviser for performance and reward at the CIPD, argues that one-off payments could be the make-do-and-mend solution to a very challenging problem. 

“The advantages of such bonuses are that they can be given without permanently increasing the wage bill, which could be important if the economy slides into recession,” explains Cotton. “They don’t flow through into other aspects of pay, such as overtime rates or pension contributions and they can be targeted at those hardest hit by the cost-of-living crisis. Additionally, because they are paid in one go, they can be more useful in paying a large bill than being spread over 12 months like a pay rise.”

But Cotton warns that there will be disadvantages if inflation doesn’t fall next year. “Will employees expect their employers to make another award to make up for the fall in their living standards? Also, if such a bonus is paid in one go, it could interfere with the benefits payments of low-waged workers and leave them struggling to budget and make ends meet.” 

Thoughts from an economist

Whether you decide to raise pay or award bonuses is a decision that will be different, and depend on lots of factors. Ultimately, organisations should not be worried about the court of public opinion - because there are other ways to look after your workforce. 

Indeed, a historically tight labour market mixed with a high level of vacancies has created a “tale of two economies”, according to Lauren Thomas, UK economist at Glassdoor, but there are alternatives. “One-off bonuses, especially sign-on bonuses that need to be repaid if employees leave early, are a good way to attract and retain staff without committing to longer-term spending,” says Thomas. “Stipends for spiking energy prices during the winter can also help take the edge off employees' outgoings.

"She adds that beyond financial incentives, employers should focus on building a great company culture and providing strong management for their employees. Culture, company values and good senior leadership are the most important factors in overall employee satisfaction, while Glassdoor’s research has repeatedly shown that flexibility and autonomy are paramount – in any profession.”