We publish the results of our pay planning survey – which looks at employers’ reward intentions for 2019 – at a time when the economy and the labour market present a series of apparent paradoxes. On the one hand, economic growth is weak in comparison with previous periods, with the manufacturing sector virtually in recession and job losses in parts of retail. Productivity growth has faltered since the crash of 2009, and business investment remains low in historic terms.
On the other hand, the labour market seems to be robust, at least in terms of falling unemployment (down to 4%, a figure it last reached in the mid-1970s) and still growing employment. But there is a debate about the extent to which the labour market may have a soft underbelly. This is mostly framed in terms of how ‘underemployment’ – the extent to which employees would like to work more hours, while falling, is still some way above pre-recession levels, indicating that there are still areas of weakness in the labour market. Our survey results tend to support the view that the labour market is tighter, or at least tightening. Over three-fifths of respondents said that pay pressures are increasing, with recruitment and retention issues the main factor behind this. It could be that we have reached the point where it is no longer possible to reduce unemployment and raise employment without increasing wages further. The changing make-up of the labour market in the run-up to and in the aftermath of Brexit could also be a factor here. In addition, while inflation is not as high as it has been in previous periods, it remains at moderate levels and is expected to remain so over the next period, with the possibility that Brexit could see it rise further (see forecasts on page 5). It is not surprising, therefore, that the cost of living has become more important for employers when it comes to determining the level of pay rises. These pressures could produce higher pay rises in 2019 than in 2018. We asked respondents how they thought their 2019 pay awards would compare to inflation. Similar proportions – just below a third – thought they would be equal to the RPI and CPI/CPIH in each case, while just above a quarter thought that pay rises would be in-between the CPI/CPIH and RPI percentage rates. If economists’ predictions are correct and the RPI is around 3% in the first quarter of 2019, then we could see a third of awards at this level (with a further small proportion, 6%, above the RPI). A further third could be worth around 2.2%, while just above a quarter could be set at intermediate levels, eg around 2.6%. Overall this points to between three-fifths and two-thirds of pay awards in 2019 coming in at 2.6% or higher, with many of these at 3% or above. Meanwhile the NLW will also continue to present an upward pressure at the lower end of the earnings distribution.
Other issues for HR/reward professionals in the year ahead include the burgeoning agenda around the reporting of various pay statistics. Employers had to publish their gender pay gaps for the first time this year. The new rules made for an enhanced focus on equal pay issues, even if figures for gaps by job or grade were not required, and this is unlikely to diminish. In fact, the prospect of extra data requirements figured in the Conservatives’ 2016 manifesto and is therefore possible even if the current administration survives. Indeed, the Commons committee on the lessons learnt from the introduction of gender pay gap reporting makes a number of recommendations that point in this direction, including gaps at deciles rather than quartiles and measures to improve data accuracy.
Added to this (in 2020) will be the obligation to report the ratios between the salaries of chief executives’ and those for each firm’s ‘average’ worker. All of this means that properly communicating reward practices to employees will gain in importance over the coming period. Another emerging theme is the possibility that more employers could consider linking pay to productivity improvements. This can be done crudely in those instances where output can be easily measured, but in most cases the emphasis is likely to be on connections between salaries and some indicator of capability, competency or skills. These sorts of relationships could help improve the economy’s poor performance in respect of productivity.
It has to be said, though, that widespread developments in this area are unlikely without a rise in business investment. This tends to be positively related to wage growth. Indeed, the fact that business investment has faltered in the wake of the recession and in the advent of Britain’s departure from the EU is a key explanation for the relatively weak real-terms wage growth witnessed since the crash. For the economy to resume growth, investment will have to begin again, whatever the UK’s relationship with its nearest trading partners. If and when it does, wage growth is likely to be stronger.