Why is pay not keeping up with inflation?

Why are wages not increasing as fast as inflation?

You will have no doubt seen the news that the UK inflation rate has hit its highest level for 40 years – 9% for the 12 months to April, up from 7% in March At the same time, according to pay data provider Cendex, the average pay increase in the UK in the first four months of 2022 is 3.5%. Office for National Statistics (ONS) data suggests a real decrease in wages of 1.2% already. Inflation has increased month on month over this period and is feared to soon hit 10%.

So why is there such a gap? And how on earth do you explain that to your employees who see daily news of fuel and food price increases?

One reason is simply one of timing- there can be a long time lag from budget to payment. Most organisations will have pay review as a major budget item and this can often be signed off well before year end – November seems to be a popular time. In the UK, the most common time for pay review is April - perhaps aligning to the tax year, or changes in minimum wage, sometimes to company year. So there can be months between agreeing a rate and it hitting pay packets. In most years this is not an issue as inflation has been pretty static most of this Millennium. ?But the last few months have looked quite different, and we can see a steady increase month on month over the last 6 months in particular to levels not seen for many years. ?

Pay tends to be reviewed once, or exceptionally twice, a year whereas inflation is published monthly. 2022 may be different. At Reward Heads we are hearing of clients and contacts budgeting for a second rise a few months on from their main review for the first time and we will be running a survey on that very point at our Third Sector Forum on June 8th and Retail and Hospitality Reward Forum on June 15th.

Prices can go down but it is very rare for wages to go down, and certainly not without consultation for individuals or in very extreme circumstances like furloughing during COVID. Pay for individuals or specific roles are more likely to see higher increases than across the board.

In fact, there is often a mismatch between inflation and pay increases. As the graphic below shows, UK inflation through the 2010s was fairly low, but wage growth exceeded it in the latter half of the decade. ?The two measures more or less even out across the decade as a whole.

Inflation (or as we call it CPI) is an agreed basket of goods, not everything we buy and by definition is about what is spent. Pay is not the same, what is earned is rarely the same as what is spent unless we beautifully balance our personal budgets – we save and we borrow as well as earn and spend. Pay is influenced by supply and demand in the market for certain skills, which can themselves be influenced by trends such as people retiring earlier or later, or going into further education, or technology making certain tasks or roles redundant and constantly emerging hot skills of the moment, as well as legislation like minimum wage and desire not to be seen as a minimum wage payer. It may be useful to explain this point.

The cost of employing people is not just about salary, far from it. We saw in April this year that this increased with the rise in National Insurance. We have also seen more investment in other areas of the reward package such as benefits. These don’t get picked up in pay increases. This is another reason to talk Total Reward – not just in financial terms but also other elements which may lead to future earnings, such as development, or may enable savings (home working and flexibility).

We are expecting a turbulent year for pay reviews, to see second pay reviews in a year, and more market benchmarking than ever before, where organisations don’t give across the board increases but target their budgets to fill particular skill gaps. We are also hearing many moving away from individual annual review percentages being driven by performance scores as the ‘pot’ is being taken up dealing with market issues and this leaves little room for manoeuvre or flex in the pot to make meaningful awards in that respect, This can leave the underpaid, steady performers moving further away from market as well paid, good performers accelerate away, as well as new hires achieving higher rates.

Many of you will know that Reward Heads has access to Cendex data. Their data shows that 46% of pay reviews are in April and 25% in January which reinforces that the best time to review data is once April’s pay reviews have been input. As Cendex is a live database, not a ‘once a year cut’, this is May and June.?

If Reward Heads can support you in any of that journey, please get in touch with our Managing Consultant, Victoria Milford, at [email protected]

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Who are Reward Heads?

????????Reward Heads are a boutique reward consultancy based in Watford and operating remotely. We work with organisations across a range of sizes and sectors to enable them to make the most out of Total Reward. Our solutions are not pre-made they are tailored to your organisation and your challenges and opportunities.?

????????Our mission is to enable everyone to realise their potential through Total Reward: our clients, their employees and our consultants.

????????We help organisations to use all aspects of Total Reward - pay, bonus, benefits, recognition and so on - to attract, retain, motivate and align the best people for their organisation. In times of a tight labour market with the ‘Great Resignation’ in the news, many organisations are not able to operate to the fullest as they don’t have the people they need, yet have a limited budget to ensure that they do and are motivating them to deliver.?

????????Reward Heads educate, advise, devise and deliver customised reward programmes and provide coaching for reward and HR people.?

Our website: www.rewardheads.co.uk