Markedly higher inflation, squeezed family budgets, expensive energy and rising interest rates are creating a perfect storm. Lucy Gordon, a director at Walker Morris, understands that employers and employees alike are feeling the squeeze. 

“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 nine or 10 per cent increases at the moment, particularly given that they face national insurance contributions on top.”

As an average, Ms Gordon is seeing awards in the region of 4-5 per cent; this means that employees are effectively earning less.

The problem of pay is compounded by what Charles Cotton, reward and performance adviser for the Chartered Institute of Personnel and Development, describes as “a tight labour market where employees can easily change jobs to earn more. If an employer can’t increase pay by enough, there’s the danger they will lose staff and find it hard to recruit new workers.”

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, behaviour, workload and commitment. But how pay is set depends on the business as there is no standard to adhere to.

In some parts of the economy, pay is determined through negotiations with unions; in other parts, it is set by independent pay review bodies, while minimum hourly pay is set by the Low Pay Commission.

In the private sector, Mr Cotton says that pay increases are often determined by considerations such as “affordability, employee performance, future business plans, inflation, and staff turnover.” He recommends that 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.”

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

Mr Cotton agrees with some form of linkage, saying that “if a business is successful, and individuals and teams perform as expected, then there should be money to pay out to staff.” If paid as a bonus, this isn’t consolidated into wages, so does not permanently inflate the pay bill. And he sees another option – giving employees shares in the business “so that if the firm becomes more valuable, the success is shared with staff.” He also suggests non-financial offers, such as linking increased productivity to extra paid leave, increased pension contributions, or other staff benefits.

Ms 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. It should also be noted that salary sacrifice cannot reduce pay to below national minimum wage levels.

Overtime as a solution

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

While 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. Employers need to monitor and record any additional hours to comply with the Working Time Regulations. These 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 under-18s. Employees can opt out of this limit.

Employee wellbeing is also a concern for Mr Cotton. 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.”