Can Reward Management Combat High Inflation?

Before I started my first job as a graduate trainee in the 1970s, my salary had already been increased above the offer I had accepted only a few weeks earlier. That year inflation peaked at a massive 24%. Fortunately, it was down to single figures a year or so later. Why do I tell you this? Well, we lived to tell the tale. So, point one is: don’t panic!

You may think that we have little in common with that period over 45 years ago. But the current level of unemployment is at its lowest since 1974. This is putting additional pressure on pay due to lack of supply. Of course, things have changed since then, but the underlying issues are the same. How do you manage reward in a time of high inflation?

There is no magic bullet, but I will share a few thoughts on how you might approach this and some specifics to consider.

The first thing to remember is that a cost of living crisis affects employees differently. But there is no question that you do need to look at pay levels.

Salary reviews will be influenced by the increase in market rates of pay driven by the cost of living. Market data on current pay increases may be more valuable in the short term in comparison to salary survey data, which is mostly a snapshot of pay for existing job holders in the past. Some surveys can provide rolling data, which may be more immediately relevant. You are inherently always testing the salary market through recruitment – this can be the best guide. So, in times of high inflation, you may need to reconsider how you assess pay markets to inform pay decisions.

Most organizations now (and it was the same in the ‘70s) look to do what they can for the lower paid. For many of them, freezing salary increases and lower bonuses for your top 10% or so of employees can generate a substantial amount to spread over your lower-paid people. Given the wish not to increase fixed costs and not disrupt salary differentials, a common response is a one-off payment. This can be weighted to the lower paid, although the same cash amount for all is, of course, disproportionately valuable for those on the lowest pay.

Relatively short-term high inflation is just one of those external environmental factors to which you will need to react. But the way you do so is far better when it is framed within a strategic approach to reward. I think a helpful way of looking at this is ‘strategic pragmatism’. That is to have clear reward principles and strategic direction but act in a pragmatic way, albeit always in line with the principles and overall strategy and values.

If you haven’t already done so, you may wish to develop a set of enduring reward principles. These can be agreed upon by senior stakeholders and cover issues such as what fair reward means, maximizing value for employees and what are the underlying drivers of pay levels such as cost of living, organizations’ ability to pay, market pay levels, living values etc. Organizations that say they reflect the cost of living will need to do so even in these tough times otherwise you will lose trust.

Maximizing value is an interesting principle to consider. What I mean is that you look for ways to maximize the value of the total reward to employees compared with the cost to the employer. Salary is taxable and subject to National Insurance but there are other ways to provide higher value for a similar or even lower cost. For example, Sainsbury’s just announced a series of additional pay increases but also free food when their staff are on a shift.

Look at what opportunities remain using salary sacrifice as well as other non-taxable benefits. Salary sacrifice remains valuable for pension contributions, cycle-to-work schemes and electric vehicles. In each case, for some employees, one or more of these may deliver value. For pension contributions both the employee and employer save NI; the employer can choose to enhance the amount contributed by their NI saving.

Benefits that carry tax and/or NI savings include life assurance, discounted or free meals provided for all, mobile phones, employee assistance programmes (EAP). Could some of these be enhanced or introduced? Many EAPs have financial or debt support or counselling offering. Providing some financial management support to employees through an external provider can be extremely helpful to some of your people.

Tax is not payable on loans of up to £10,000 from the employer. This concession is mostly used for travel or season ticket loans that are paid back monthly by salary deduction. However, a loan can be for any purpose. So perhaps with fewer people commuting, how about repurposing loans for general financial help?

The shortage of labour and the increase in costs also points to the need for organizations to improve productivity, something UK businesses have been criticised for not investing in. Are there opportunities to increase efficiency or save waste that could release funds to support increased pay or bonus? To the extent that you may pay bonuses to some of your employees, do they support or help drive innovation, savings and efficiency? Maybe they should. Also, remember that there are some tax concessions for suggestion schemes including up to £5,000 tax-free where a significant saving is made.

Reward is only one part of the Employee Value Proposition (EVP). So, whilst it is important to get reward right, there remain a whole load of other reasons why people work for a particular business such as management effectiveness, recognition, colleagues, challenge of work, learning, purpose of the organization. Make sure you understand what is important outside to your employees outside of rewards and work on those things as well.

Finally, a word on communicating reward. To help maximize value, it is critical to ensure people in your organization understand how the reward principles and how the reward system works and why, what each part is and the total value. This is always the case but it’s even more important now. Too many organisations spend almost no time explaining the different parts of reward; it is little more than an afterthought. But it is the way to help people see whatever changes you make in context and will release the value of everything you spend.