Avoiding the wage spiral

The world is in economic meltdown. Materials and products are in short supply, labour is at a premium – if it can be found, and energy is crucifyingly expensive. And to complete the perfect storm, interest rates are rising.

Avoid the wage spiral. (Image: iStock/Getty Images Plus)

It’s easy, therefore, to see why employees are seeking not just a pay rise, but an inflation busting pay rise; many are struggling to feed their families, fuel their cars and heat their homes.

Pay awards

Lucy Gordon, a director at Walker Morris, understands employers and employees alike are feeling the squeeze at the moment. 

“Most employees,” she says, “expect an annual pay increase at least in-line with inflation, which is currently running at its highest rate in 40 years. So, it’s entirely understandable that employers can’t afford to be offering 9 or 10% pay increases at the moment, particularly given that employers face national insurance contributions on top.”

As an average, she’s seeing awards in the region of 4-5%; this means in practice that employees are effectively earning less.

But the problem of pay is compounded by what Charles Cotton, reward and performance adviser for the CIPD, describes as “a tight labour market where employees can easily change jobs to earn more.” For him, the issue is that “if a firm can’t increase pay by enough, then there’s the danger it will lose staff and find it hard to recruit new workers.”

Setting pay

When setting pay, the first thing to understand is that there is no legal right to a pay rise unless it is stipulated in the employee’s contract; logic demands that pay rises should be based on employee performance, employee behaviour, workload and commitment.

But how pay is set depends on the business as there is no standard to adhere to.

Cotton sees that in some parts of the economy, pay is determined through negotiations with unions, in other parts its set by independent pay review bodies, while minimum hourly pay is set by the Low Pay Commission.

Specifically for the private sector, he says that pay increases are often determined “by HR teams taking into consideration affordability, employee performance, future business plans, inflation, and staff turnover.” However, he recommends employers be as open and transparent as possible about the pay process and outcomes because “staff will be more likely to see the decisions as fair if they understand the reasons for what’s being offered and why.”

Gordon sees a similar pattern – that pay is rarely negotiated with employees and is usually determined by the managing director in smaller businesses, and by remuneration committees in larger businesses and plcs. She tells how “remuneration committees have the job of benchmarking pay both externally, in the market; and internally, between staff operating at the same levels.”

And in unionised industries, Gordon sees pay negotiated between the employer and the union, and “this is why we are seeing a return to strike action when these negotiations are not successful… employees are facing a crippling cost of living crisis and the unions are trying to secure the best deals they can.”

A question of productivity?

One solution to the problem of pay is to link pay rises to productivity or some other deal that gives both sides something. Gordon likes this as an idea, whether that be piecework or tying salary increases to team or company performance. “However,” she says, “even when businesses are out-performing their previous results, it may still be difficult to give substantial pay rises, given that recession is looming.”

Cotton agrees with some form of linkage, saying that “if a firm is successful, and individuals and teams perform as expected, then there should be money to pay out to staff.” The advantage of this is that because the bonus isn’t consolidated into wages, it doesn’t permanently inflate the pay bill.

There is another option for Cotton – giving employees shares in the business “so that if the firm becomes more valuable, then the success is shared with staff.” And to this he adds non-financial offerings, such as linking increased productivity to extra paid leave, increased pension contributions, or other staff benefits.

Gordon too looks to non-salary incentives such as salary sacrifice “that can present real advantages for employers and employees” by offering a tax and NI efficient way of purchasing items such as bikes and cars and making pension contributions. In her view this may be a better option for employers than a pure pay increase, but it’s not suitable for all as employers must think about what happens if an employee leaves part-way through the repayment term. Also, salary sacrifice can’t reduce pay to below national minimum wage levels.

Gordon also thinks that employers need to be inventive about what they can offer to staff to ease the strain on income, but which costs them less too. She says that “we’re seeing some really novel ideas that tick other boxes as well, such as corporate discounts on energy-saving devices, electric cars and solar panels for home offices.”

Overtime as a solution

Could working overtime be a solution? Possibly, but Gordon would suggest that employers and employees check contracts first. “Overtime,” she says, “is often offered by an employer, and depending on the contract, the employee might be compelled to work it or might be able to decline the offer.”

While the law demands that employees receive at least the national minimum wage on average for all hours worked or treated as worked, overtime can be a good solution if employers have work available, but as Gordon says, “for businesses experiencing a reduction in work following the pandemic, this might not always be an option.”

Employers do need to monitor and record any additional hours to make sure they abide by the Working Time Regulations to minimise any potential negative effects on health and safety. The regulations state that employees cannot be forced to work more than an average of 48 hours in an average of 17 weeks if they are over 18 – different rules apply for those under 18. Employees can opt out of this limit.

Employee well-being is also a concern for Cotton too. He says that “while working more hours can help in the short term, in the medium and longer-term it can cause mental and physical health problems and result in a drop in productivity.”

Threats made

Even with the best will in the world negotiations may fail and offers rejected. So, how should employers react if employees are upset with response to a pay rise request and threaten either work to rule or strike action?

In some cases, employers will have to rethink and potentially roll over and pay. 

But if it comes to it, strikes and ‘work to rule’ will cause disruption to a business and can affect supply chains, which may lead to an employer then breaching the terms of its contracts with customers. For Gordon there is more to worry about: “Employee relations issues can also expose the business to negative publicity.”

Where collective bargaining agreements are in place, Gordon cautions employers to make sure they are followed and fully exhausted in order to try to avoid industrial action. However, she says that “it may not be possible to avoid industrial action altogether. How such action should be handled depends on whether the action is lawful (authorised and endorsed by a union) or unlawful (where employees take matters into their own hands).”

For industrial action to be lawful, the union must have complied with a series of statutory requirements (including strict balloting and notification requirements) and the action taken must have been done in contemplation or furtherance of a trade dispute.

If the rules are followed the union will be immune from liability for any losses incurred by an employer as a result of the industrial action. In contrast, any unilateral action by employees that is neither official nor lawful is likely to lead to individual disciplinary action which could potentially result in dismissal without notice for unauthorised absence. And where action is shown to be unlawful, it’s possible to obtain a court order to prevent it.

But unrest can lead to a non-unionised workforce seeking to become unionised. In this situation, Gordon advises employers to consider “placating staff by agreeing to an informal request for voluntary recognition which might give the employer more scope to determine the remit of the union.”

Sight shouldn’t be lost on the fact that union officials will have a good handle on what pay rates and pay rises have been achieved in similar companies and can advise their members what is going on outside their company ‘bubble’. In other words, union officials can explain the bigger picture to disaffected employees and also discuss possible cost reduction measures with an employer that the union can put to its members to make any increase affordable; they can condition expectations to a realistic level to some extent by explaining the fact that companies are suffering, and some have become insolvent due to their cost base, including pay, being too high.

Of course, it’s better to avoid conflict in the first place which is why Cotton advises employers “to go to arbitration to resolve any pay disputes.”

Conclusion

The issue of pay is perennial, and it’s exacerbated by the web making comparisons and job hunting easier, and the exigencies of markedly higher inflation and squeezed family budgets. Of course, employers are in the same position. But for the moment at least, employees appear to have the whip hand. If pay demands cannot be met, employers need to be creative in offering low cost but valuable alternatives.

Panel: Stay interviews

According to an August release from the IMI, there’s to be a shortfall of 160,000 workers in the automotive sector by 2031. Caused by the electric vehicle revolution, the pandemic, decreased immigration and fewer people of working age, firms are having to work harder to recruit staff.

But a better solution is to not lose them in the first place and a tool to prevent loss is the ‘stay interview’.

The polar opposite of an exit interview where employers ask why an employee is leaving, the stay interview seeks to understand what would make an employee stay put – what are their motivations including pay, what could be made better for them, and how they envisage their careers developing and how the employer can facilitate this.

A stay interview is an informal conversation that aims to relax and reassure employees that the employer wants to understand and help with career progression. It should encourage an employee to speak freely, without fear of retribution, where they can give feedback on what is wrong in the organisation and where they would like to see improvements.

These interviews are not a one-time deal where an employer goes through the motions but neither responds to what has been divulged or regularly repeats the process to maintain an on-going understanding. And nor should they be tied to performance or pay reviews.

It’s important that employees can see, post interview, that their comments have been taken on board and change has been actioned where possible. A process that operates on the basis of lip-service is a futile waste of time that will invariably do the exact opposite of what was intended – it’ll cause employees to distrust management and seek to leave.

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