Where in the world are pay awards going in 2023?

The Covid-19 pandemic, immediately followed up by the almost-equally remarkable and unpredicted Ukraine-invasion-driven, almost-doubling jump in price inflation last year (from 5.5% 12 months ago to a marginally reduced 10.1% in last week’s ONS stats ), have well and truly blown away the somnolent, market-matching world of (low) pay setting in the UK’s 2010s.

But what will replace it? And as the nurses suspend their planned strike action next week to enter into discussions (at last) with the government to find ‘ a fair and reasonable settlement’, how can you set, agree and distribute pay awards in the current highly volatile (emotionally and economically-speaking) climate?

For those of you like a number of my cost- and cash-squeezed clients (as the UK teeters on the brink of recession), currently in mid-negotiations for an April pay review, the answer is critical to their futures. But as veteran board chair Rick Haythornthwaite commented last week (with typical blunt under-statement), ‘the future seems unusually hard to predict’.

The continuing macroeconomic and political uncertainty helps to explain why 73% of the CEO’s of 300 global firms surveyed in Teneo’s aptly titled ‘ Where is the World Going?’ research remain pessimistic about their likely performance in 2023. But what about the world of pay, where is that going in the UK and how do you set and agree the appropriate rate of award this year?

Too much and unaffordable?

Pay too much and, as the government reminds the striking NHS staff groups, rail workers, teachers and civil servants with monotonous frequency, we will be into ‘Back-to-the Future’, 1970’s – style runaway ‘stagflation’, which would decimate everyone’s living standards. Somehow they curiously seem to forget last week’s ONS data release showing continuing record year-on-year falls in our real earnings – of 3.1% in total pay, even more in the public sector - and living standards). As Chancellor Jeremy Hunt reportedly put it, ‘Any pay deals must be within existing departmental budgets and not fuel inflation further…current union demands are unaffordable’.

‘I would love’, Prime Minister Sunak told the nurses (somewhat unconvincingly, and more economically than lovingly), to fund their ‘massive’ pay claim: ‘nothing would give me more pleasure, than to wave a magic wand and have you all paid lots more’ than the 4% recommended by their Pay Review Body before the inflationary spike really took off last year.

But, he continued, (a big but), ‘but I’ve got to get a grip of inflation for all of you, it’s the most important thing: if we don’t do that, we won’t be able to afford anything’. Conveniently ignoring the growing evidence that nurses and many other UK employees already can’t afford both the food their families need to eat and energy to heat their homes in order to survive. Half of NHS trusts are already providing or planning their own food banks for staff.

And ignoring the 15% settlement deal he signed off late last year for the striking criminal barristers , which is only just below the original 19% claim of the Royal College of Nurses, designed to make up for this level of cumulative cuts in real pay since 2010. The junior doctors have just this week voted overwhelmingly for strike action in search of ‘full pay restoration’ of the 26% cut in their real pay since 2008.

Too little?

Pay too little though and, as Haythornthwaite said last week, ‘you are risking losing the best you have: it is a big danger, with continuing ‘tight labour markets and a rush to secure top talent’ meaning that ‘the highest earners are demanding even greater pay’. Headhunter Sita Kolosa was even told by a (male) private equity client that his salary of “￡1million was not enough’.

Police officers don’t earn ￡1 million pa; and nor do they?have the nurses’ or rail workers’ current freedom to strike in protest at what the RMT’s inimitable Mick Lynch referred to as their latest ‘very puny’ pay offer (of 9% over two years).

But National Police Chiefs Council, the Police Superintendents Association and the Police and Crime Commissioners Association warned jointly this week that real-terms cuts to?police pay (of 17% since 2010)? were ‘undermining the impact of a continuing recruitment drive amid collapsing morale and high staff turnover’. Releasing the results of a survey of members, PSA president Paul Fotheringham said the pay situation was creating ‘serious concerns about the future of UK policing.’ Similar findings are evident in the latest NHS staff survey: declining levels of engagement, combined with increasing workloads and stress leading to more than a fifth of staff expecting to leave the Service.

2023 award levels

So how do you set pay levels in 2023, achieving a ‘goldilocks’ level of award so as to avoid the twin-dangers of bankruptcy or strike action? The HR directors surveyed in CIPD’s latest Labour Market Outlook earlier this month forecast a median pay increase of 5% this year. The 2% average prediction from those in the public sector perhaps indicates an element of hope rather than expectation in their estimates.

This months’ ONS data for regular base increases in the last three months of 2022 of 6.7% overall, 4.2% in the public sector, are probably more realistic future 2023 award indicators. While the Bank of England? said ?it was expecting?inflation in the UK to ‘fall sharply’ from the middle of this year in line with the Prime Minister’s commitment to halve the 11% peak rate, the CBI business group is forecasting that it will still be at 6.7% by the end of 2023.

XpertHR’s prelimary analysis of January awards on its database found an average increase across the economy of 6%, which I suspect will come closest to becoming a ‘going rate’ across the economy this year. Striking ambulance workers rejected an improved offer of 5.5% from the Welsh government in their ballot results announced last week. But nurses’ leaders in Scotland are recommending their members accept the Scottish government’s latest offer of a minimum 6.5%; and the Fire Brigades Union postponed their planned nationwide strike after local government employers made an improved offer of 7% for the current financial year and 5% more in July for 2023/24

2023 awards advice

However, rather than simply following any attempt to discern a ‘going rate’ of market increase, based on my recent experiences I would recommend that you consider looking in the following directions for pay enlightenment in such a foggy and unpredictable climate:

1.?????Look inside not just outside. The barristers 15% award, BT’s flat rate award averaging 16% to end their strike last year, or Rolls Royce’s 17% December award? Or the increases totalling over 10% in 2022 at Lidl and a number of the food retailers; or the university employers-imposed increase of 3.18% for 2022/23 and minimum proposed 5% for this year, both skewed towards the lower paid. Or the 3.1% average increase across the power and water companies in the last twelve months? An 11% growth for professional services jobs in 2022/23, or just over 4% for jobs in transport (but disguising more than 30% year-on-year increases in some firms for HGV drivers)? Which awards do you follow, what’s the ‘going rate’ now?

These huge inter- and intra-sector and occupational variations indicate that a uniform market rate is dead, at least for now. So look outside very specifically at what’s happening at employers like yours and your labour market, not just product market competitors.

But try looking internally instead of?pursuing what my dear old friend Michael Armstrong refers to as ‘extreme market pricing’.

Look at your own employer’s financial position and affordability, as well as the profile and needs of your workforce and how many are facing real poverty and hardship.?The government wrote to the public sector pay review bodies in a letter published this week saying that awards of 3.5% were affordable… on the same day that we learned that the public sector finances were better off than the forecast deficit by some ￡30 billion. Upping that pay award limit to 5% would cost another ￡3.7 billion if applied to all public sector workers.

What are the implications for their pay awards this year when major firms such as Unilever seem able to pass on their increased costs to their customers relatively easily with the higher consumer prices we are all suffering from right now – up for them by an average of 13% in the last quarter?

Remember too, as the TUC’s research showed recently, that dividends and returns to shareholders have increased at three times the rate of average earnings since 2010; while chief executive remuneration as a multiple of average pay has increased by 2.5 times since 2000 when it was already at 50:1 and was up on average by a cool 39% last year according to the High Pay Centre’s analysis.

2.?????Look downwards rather than upwards. Many of the awards just listed were rightly skewed towards the lower paid workers who are suffering most from this inflationary squeeze, with additional awards last year at Virgin Money and Nat West for example, applying to those already earning less than ￡30,000 - ￡35,000. The original ￡1,500 flat rate award proposed for the NHS represented a higher percentage increase for their lowest graded workers, and BT’s award made to those earning less than ￡50,000 was similarly structured.

With both the Real Living Wage and the government’s minimum National Living Wage increasing by some 10%, employers may fear pay compression higher up their pay structures. But pay differentials and inequality have been increasing for more that two decades now, so a bit of movement the other way, which also helps to reduce gender pay gaps when the majority of lower paid workers are female, seems long overdue to me.

Given the continuing high growth in share prices and capital gains, remuneration committees should be setting executive awards at, or preferably less than, pay increases for their other employees; as well as enfranchising them with all-employee share awards where possible. The 2010’s obscenity of the ￡100 million executive bonus thankfully seem to be dying out.

3.?????Look medium-term not just short-term. Weirdly, the greater the uncertainty and unpredictability the stronger the mutual benefits, to employers and employees, of guaranteed increases in their pay over more than twelve months, allowing them to budget and plan for their financial needs ahead. It is uncertain and highly variable, as well as low pay, imposed through the mushrooming growth of zero hours and other ‘one-way flexible’ contracts over the past decade, that helps to explain the millions now experiencing in-work poverty in the UK.

My IES colleague Steve Bevan makes a cogent case for multi-year deals and the Health Foundation sees this as a potential solution to the nurses’ dispute. Recent examples include the Ministry of Justice and HMRC in the public sector, as well as private sector companies such as AWE. So the rail companies are surely on the right track, for once, to be exploring two-year deals with their trade unions.

4.?????Look beyond base pay. Setting the right base pay level is critical as the foundation for your pay and wider reward strategy. But we have seen excellent examples over the past 12 months of employers and their unions coming up with additional, creative ways to improve the standard of living and security and welfare and wellbeing of their employees.

Around one-fifth of private sector employers have made emergency, one-off, additional cost-of-living payments to their employees in the past year, while retailers such as John Lewis and Sainsbury’s extended their free and discounted food offers for their employees over Christmas and into the new year.

Brought to the fore during the Covid pandemic, but with continuing momentum over the past year, health and wellbeing benefits especially in support of improved mental health and financial wellbeing are now integral to the recruitment, retention and rewards offer in a majority of larger employees. As the CIPD says , ‘good health and wellbeing can be a core enabler of employee engagement and organisational performance’.

Be it an additional one-day’s holiday agreed as part of the recent pay deal for local government employees, through to the one-off bonus and financial education and support introduced by the Children’s Society , think more broadly about the needs of your employees and how you can better support and recognise them in the next 12 months…. on top of a decent base pay award.

‘And all for love, and nothing for reward’

The government may have been hoping that Edmund Spencer’s famous quotation from The Faerie Queene was still a viable employment model for their millions of employees across the public sector. But first Covid-19 and now the inflation-driven cost-of-living and in-work-poverty crisis have blown away the cosy, employer-driven, market-wagon-train-following, low pay and low people investment model that so many employers, including them, followed over the previous decade. Some of us might say ‘good riddance’ to it.

But without a clear common rate of award and much wider disruption and uncertainty evident and continuing across the UK and economy, pay setting has undoubtedly become a more challenging process.

Rather than recommending the 5% to 6% rate that appears to be where the majority of April awards are settling, I have instead recommended that you adopt a broader and more thoughtful, tailored approach to pay setting, characterised by balancing:

·???????internal financial and employee needs with external market pressures;

·???????the survival needs of your lowest paid workers with the continuing recruitment and retention pressures evident for your professionals and executives in such a tight employment market;

·???????the medium-term as well as the short-term outlook for pay; and

·???????the broader benefits and wellbeing package, as well as the pay your provide.

The joint statement issued by the government and RCN on the eve of them entering into ‘intensive talks’ this week said that:

’Both sides are committed to finding a fair and reasonable settlement that recognises the vital role that nurses and nursing play in the NHS and the wider economic pressures facing the UK and the prime minister's priority to halve inflation’.

Employers and HR professionals would do well to adopt a similar balanced, tailored, thoughtful and participative approach to their pay review in 2023 and beyond.