Brace Yourselves: Reward Storm Incoming

The NLW rise in April will put a little more in people's pockets at the bottom end of the scale, but the NI rise on top of that hike is heaping pressure on businesses and putting a squeeze on pay pots as they seek to mitigate losses. All this hints heavily at another busy chapter in the lives of HR and reward professionals as they reach for a Swiss army knife of measures to balance dwindling pay pots with the need to attract and retain the best talent.

Without doubt, pay structures are going to be placed under scrutiny. Consecutive years of NLW rises have combined to create compression within many organisations and the need to review those pay structures. One common approach has been to simplify pay and grading structures: having fewer grades and broader pay ranges can help alleviate compression and enable pay progression to happen without promotion to a more senior role.

The tumultuous nature of things over the last few years - the pandemic, economic volatility and political upheaval at home and abroad – has also made flexibility within pay structures increasingly important. Rigid pay structures and policies allow little flexibility to businesses to navigate change, and the upcoming legislation changes are only going to add to that pressure.

Although inflation is slowing, cost-of-living remains high and with pay review budgets under threat many employers face the possibility of a stand-off with their best performers. In a recent Pay Trends survey by Innecto Reward Consulting, 33% of organisations said that the upcoming increase in Employers' NI will impact their pay review budgets, and 37% were still undecided. Where we might see the real impact of this is in pay progression.

To balance a squeezed budget against continuing cost of living pressures, companies are going to have less budget to vary any increases applied outside of an across-the-board rise. That pressure for differentiation might come from a variety of factors, for example movements in the market, performance or position within a pay range. Where budget does exist, tough choices will need to be made in balancing the relative importance of each factor. Should our priority be to keep in line with the market where it moves most quickly? Or should we simply reward strong performance or contribution with larger increases? The answer is likely to be nuanced and specific to each company.

For employees to trust that their pay is being managed fairly, employers need to communicate how pay decisions are being made and, crucially, explain the factors impacting those decisions. Often when businesses look to build greater flexibility into their pay structures, employees can mistake that flexibility for inconsistency. This puts a greater emphasis on transparency and communication.

Being open about pay is relatively easy when the money is there to spend, but when budgets are under pressure and tough decisions needed, that same openness can feel far more difficult. The big issue here is that most employees will fill an information vacuum with their own conclusions. Even if they're unhappy with the outcome, an open and honest conversation around pay can build that trust in the fairness of the process. Training and empowering managers to do this is becoming increasingly important.

With costs increasing we're also likely to see an impact on benefits, which were widely neglected in the aftermath of the pandemic and may now be out of sync with many companies' working practices and cultures. Plans to enhance or introduce new paid-for benefits may be put on hold while costs are managed, but a review of their relevance and the return on investment they are bringing is likely to be a strong measure across the board, in particular seen through the prism of hybrid working and the need for greater flexibility.

Interestingly, one contradictory trend is emerging where companies are trying to move people back into the office for a minimum number of days. It will be intriguing to see how that tension plays out this year because when budgets are squeezed, work-life balance and flexibility are two levers businesses can really pull on when they're trying to attract and retain the best talent.

Randstad's recent annual survey into the world of work was ground-breaking in defining what motivates employees. For the first time in the survey's 22-year history, 'Pay' was pushed down into second place by 'Work-life balance' as the highest-ranking motivating factor. The difference was marginal but not among Gen-Zers who ranked work-life balance a lot higher than everyone else. Given that generation represents the future of the workforce, those ranking places might be there to stay, and that is worth pause for thought.