Mark Childs, Director, Total Reward Group and former CIPD vice-president, Reward, discusses the country’s Conservative future

Westminster

With a majority Conservative government bedding in, accelerating economic growth and the increasing probability of a rise in interest rates within the next six months, it is timely to consider emerging reward trends.

The Living Wage – will have a profound effect on reward practices in low pay sectors, such as retail, catering, care homes, hospitality and facilities management. These businesses generally operate with low margins and employers will look to mitigate the impact of higher hourly rates by reducing overtime and unsocial hours premiums and cutting back on benefit costs, such as staff discounts. The impact of a c6% p.a. increase for lower-paid staff between now and 2020 will create pressure on pay differentials. The financial incentive to become a team leader or first-line manager will go in these sectors and there will be complaints of unfair treatment if lower paid staff receive materially higher percentage increases.

The Labour Market – the unemployment rate started to fall in the summer of 2013 and while the pace of decline has slowed as we approach ‘full employment’ an increase in interest rates and policies curtailing immigration will mean the demand for skilled workers will outstrip supply. Employers will respond with higher cost location supplements, higher salary offers for those with scarce skills and generally higher pay increases as pressure from any interest rate rises feeds through to the pay round.

The above factors speaks to the return of pay inflation, but the ability of employers to meet this higher expenditure is finite. In the public sector, the 1% cap on pay increases will become harder to sustain as the labour market strengthens and trade union opposition to incomes policy intensifies.

Segmentation – There will be a growing concern to retain talent. This will feed more segmented reward practices, with more innovation in variable pay, including new forms of sales incentive and bonus plan design, as well as more long-term incentive plans. The goal of harmonised benefits provision will become a more remote ambition as the living wage expenditure chases out increased benefits spend. However, the wish to enhance the employer brand will resurface as firms find themselves having to work harder to attract candidates. For those with limited financial rewards, a rediscovery of the learning and development agenda seems likely, with organisations emphasising their ability to add value to the individuals’ employability.

Pensions – The days of occupational pension schemes are numbered, with employers abandoning company pensions in favour of auto-enrolment vehicles at statutory contribution rates, mimicking the Australian experience. It seems reasonable to assume that the auto-enrolment opt-out will be removed and the statutory contribution rate will increase beyond those announced to 2018.

For executive pensions, employers will find it hard to justify pension cash alternatives at markedly higher percentages of salary than general employees, and punitive taxation will diminish executives’ ability to accumulate capital at anything near the level of the previous generation.

When combined with further limitations on severance payments, such as the £95,000 cap announced recently for the public sector, it is likely that executives will seek higher rewards through share schemes and other forms of long-term incentive.

Equal Pay – 2016 will be the year this 45-year-old legislation has a real impact on the private sector, with the requirement to publish average pay by gender in organisations of more than 250 employees inviting a more sophisticated approach to addressing gender-based pay differentials.