The People Bulletin

For anyone commenting on pay levels and earnings movements in the UK over the last 10 years, the landscape has been predictable. But in its predictability it has also been a reasonably attractive scene to survey. Each year pay levels have moved forward relatively gently and steadily; even taking in to account any market fluctuations.

During these 10 years most commentators ‘in the know’ when asked about pay inflation would adopt a facial expression that implied they were having to draw on all their knowledge and experience before declaring, ‘about 3 to 4%’, as if they had just delivered some extraordinary piece of wisdom to which only they were privy.

The reality is that the prediction of ‘about 3 to 4%’ has been a safe one for as long as most of us can remember; that is until the Autumn of 2008 when things started to change, and change quickly.

The sudden downturn in the UK economy has had many effects and one of the most notable for the HR world has been the impact on the decisions employers have been making with regard to setting and managing pay.

What influences pay?

To understand a bit more about what has changed we need to spend a little time considering what affects pay levels in general terms.

The kinds of factors that apply upward pressure on pay include such things as:

• Inflation
• Company/organisation/sector performance
• Recruitment and retention issues
• Skill shortages
• Union pressure
• Legislation driven changes e.g. national minimum wage or equal pay legislation.

This is not an exhaustive list neither does it make reference to factors that exert downward pressure on pay; it does though contain some clues as to why the landscape may have changed in the last six to nine months.

So if we consider the first two items on the list, it’s pretty clear that in a low, almost zero inflation economy and with most sectors struggling to perform, there is no desire on the part of employers to reward staff more highly. In fact the opposite is undeniably true and is driven to a large extent by necessity rather than any selfish motives.

Likewise, in an economy where many organisations are considering or have already implemented a recruitment freeze and where employees are ‘keeping their heads down’, the normal rules of supply and demand have been temporarily suspended. So while there are some areas where skills are still in short supply, the current levels of general stagnation in the employment market are impacting on recruitment and retention issues.

The last two items on the list are to some extent still in play; trade union representatives are of course keen to do all they can to ensure their members are getting a good deal in terms of the rewards they receive. But much union energy is currently diverted towards defending the very existence of jobs. In a context where many employees are facing redundancy or reduction in working hours, the issue of absolute pay levels takes a back seat.

And there is some evidence as well that even an issue as fundamental as equal pay has been pushed slightly down the agenda, being replaced (hopefully only temporarily) by the need to ensure job losses are kept to a minimum.

All in all then, we can see how the general market conditions have changed to such an extent that almost all of the factors that apply upward pressure on pay have been impacted.

But how does this feed through in to the actual process of setting pay?

Then and now - some quick research

Around 12 months ago we saw some confusion creeping in to the minds of employers around setting and managing pay. At that time the media was heavily focusing on fuel and food prices, and all the evidence pointed to a possible upward trend in pay settlements. In fact some employers were making bold steps to increase pay levels above the ‘norm’ (remember the oil tanker drivers?).

The normal buoyancy that the April pay review season brings was though somewhat muted by a feeling that things were perhaps beginning to turn in the economy.

In an attempt to get some clarity we asked some of our salary survey contributors to answer questions on a range of topics relating to pay rises. Then we asked a broadly comparable group a similar set of questions at the beginning of April this year and the contrast in the results tells its own story.

Each survey ran to around 20 questions and space does not permit a full analysis of the results here. But some of the key highlights from that mini-survey exercise are as follows:

• In April 2008, and based on their own experience, 83% of respondents said that inflation was applying upward pressure on pay. Twelve months on and only 19% feel the same way, with 43% saying that inflation, or lack of it, is now depressing pay rises.
• Interestingly, in April 2008 36% of the sample reported that company performance was counterbalancing inflation by applying downward pressure on pay levels in their own organisation. That figure has increased this time round but only to 43%, not a marked change.
• 12 months ago roughly half of the sample felt that skill shortages were having an upward impact on pay levels but now nearly 68% feel that such shortages are not having any effect at all on pay; this underlines the point about where this issues sits in the current hierarchy of key HR issues.
• In both surveys, around 80% of respondents said that trade union activity had no influence at all on the setting of pay. This may be partly explained by the make-up of the sample. An interesting footnote though is that in both surveys well over half the sample reported that they thought union pressure was pushing up pay levels in other organisations, just not their own.

In light of the current economic outlook, one set of questions was added in the latest survey and the answers to these show clearly what shape the landscape is in currently.

Asked about measures taken to manage and control payroll costs in the current climate, here is what respondents said:

• Already nearly 25% of respondents have introduced a pay freeze and 3% have implemented a pay cut.
• Of those that gave a pay rise at the last round, more than 45% have given less than in the previous year and a further 24% have given the same as last year.
• Over 50% have either reduced or cut overtime or have cut entire shifts.
• 70% are actively considering the introduction of these measures or extending them where they are already in place.
• 60% have implemented a recruitment freeze and of the remaining 40%, a quarter are actively considering this as a measure.
• Most strikingly perhaps, 63% have already cut job numbers and of the remaining participants, 70% are considering taking this action in the near future.

Of course some respondents reported continued relative stability with many others pointing to how their own prudent management has alleviated the impact of the recession on their organisation.

But by and large it is clear that the factors that were applying upward pressure 12 months ago have been replaced now by those that are much more reflective of the struggling economy.

In the space of 12 months we have moved from a stable and relatively easy to manage set of factors for setting pay levels into a world where drastic measures are needed to keep on top of the issue.

Perhaps the best way to end is to share a comment made by one of the participants in the April 2009 survey. In some ways it encapsulates much of the current thinking around setting base pay levels. Here’s what the respondent told us;

‘Our approach was – if we want to be here tomorrow, we need to bite the bullet today.’

Makes you think doesn’t it?