As the National Living Wage steadily increases, Helen Swire looks at the UK pay picture and asks if we are close to achieving pay equality
The pound has been fluctuating in value for more than a year, experts are warning that we are on the verge of a housing market crash – and with the Conservatives failing to secure a majority government, British employees are less focused on the technicalities of their benefits package and more concerned about the impact of all these tremors on their pay.
And yet the controversy over the highest and lowest paid continues – despite nearly a decade of increased scrutiny surrounding bonuses and pay rises for senior executives across a number of different sectors.
One company made headlines earlier this year when announcing it was “not in a position to offer an increase [to pay] in 2017” – while the chief executive’s pay package totalled £1.5m, including a bonus, company shares, pension, health and life insurance and a company car.
This is not a lone case: similarly depressing pay stories can be still be found, with some companies facing revolts from employees and shareholders.
Ian Cass, managing director of the Forum of Private Business, says: “While the small and medium-sized (SME) firms and microbusinesses that we represent have not tended to take such big bonuses, we will still see big business giving big bonuses. The financial sector still seems to be doing it and large share deals for directors seem to be as alive and well as ever.”
He adds that while the exchequer might be cracking down on salary sacrifice, that won’t necessarily prevent loopholes. “They keep tinkering with the symptoms rather than dealing with the root cause of all this: our ridiculously large and complicated tax code and system. It allows clever tax advisers to continue to find alternative means of rewarding high earners.”
So what about the low earners? Are they getting any breaks in the tough economic climate?
The cost of living
Forget the National Minimum Wage – the conversation since 2016 has been all about the impact of the National Living Wage (NLW). The NLW applies to employees aged 25 or over and stands at £7.50 per hour at the moment, but is projected to rise to at least £9 by 2020.
For some of the lowest earners, especially among the youngest staff, this represents a welcome pay rise. But aside from this, the current pay picture isn’t pretty, according to the TUC’s head of economic and social affairs, Kate Bell.
“June figures showed that real wages [after inflation] are falling again, and the rate of growth, even of nominal wages, is slowing down,” she says. “Recently, inflation has been outpacing pay, while we are seeing higher prices as the value of the pound has fallen since the Brexit vote.”
While she credits the NLW with having an initial impact at the bottom of the labour market, Bell also firmly believes it should be increasing at a faster rate: “We think it should reach £10 per hour as soon as possible – and certainly faster than is planned at the moment.”
This is all very well for the employee, but with the economic uncertainty and still-rising inflation, can employers manage these increases?
Many believe it’s the benefits package that will take the hit: while some firms might want to increase benefits to differentiate themselves from other NLW-paying companies, many will feel the strain on their bottom line.
“Benefit packages are an area where employers can stand out from the crowd if they need to recruit, allowing them to say: ‘Yes, we pay the living wage, but our pension contributions are a little bit higher than our competitor’,” says Sheila Attwood, managing editor, pay and HR practice at XpertHR.
“But the NLW will affect pay rises in general: there’ll be some organisations that could afford to pay all employees more if they didn’t have to pay the living wage.”
Ruth Thomas, director at Curo Compensation, agrees: “It makes it hard for organisations to manage in terms of the pay differentiation, and that’s a key message: employers are going to have to find new ways of recognising and rewarding staff.”
First and foremost, employers must decide how they are going to implement the NLW in their business in relation to their pay structure: no pay rises at all? Pay rises only for those who don’t benefit from the NLW? Full NLW extended to include those under the age of 25?
“Any organisation deciding to pay the NLW to a wider group than is entitled to it, for example those who are aged 18 and over, must think it through, as there will steep increases over the coming years,” warns Attwood.
“It’s important to think about the whole business: there are lots of little, individual factors around the make-up of a workforce and what will work for them.”
While it may be easier to pay every employee on the same basis, this may well cause issues down the line when it comes to the retention of key talent or to driving productivity.
Thomas points out that this should mean that employers really examine how they are driving their reward strategy.
She says: “If employers can’t give big pay rises to everyone but want to do so for their key talent, they need to think about the little things that count to make people feel recognised, valued, rewarded – and ultimately to stay with the organisation.”
An old inequality
And it’s not just the NLW that employers are contending with: from this year, more than 7,600 UK businesses employing more than 250 people will be affected by gender pay gap reporting. These employers are now required to report:
- gender pay gap as a mean average
- gender pay gap as a median average
- bonus gender pay gap as a mean average
- bonus gender pay gap as a median average
- proportion of males receiving a bonus payment and proportion of females receiving a bonus payment
- proportion of males and females when divided into four groups ordered from lowest to highest pay.
The results of reports will be publicly available – including to current employees and potential recruits – and the aim of the legislation is to encourage companies to reduce any significant pay gap between male and female employees.
Since this legislation came into practice in April, few companies have yet reported (and indeed they have 12 months to do so), and government research showed that prior to the pay gap reporting legislation, three in five companies have never undertaken a pay gap review and had no plans to do so.
Worryingly, according to research from NGA Human Resources earlier this year, over a quarter (29%) of senior personnel within UK enterprises do not regard the gap as an issue for businesses.
Indeed, the report revealed that only 17% of decision-makers said they believe that government regulations on pay gap reporting will help to break down the divide, while one in five (20%) will not even be ready to disclose their data on time.
“Many businesses will need guidance on how to measure pay gaps and how to present it to the market appropriately,” says Fiona Hathorn, managing director of Women on Boards UK.
“With a bit of thought it shouldn’t be that difficult to count workers and work out average salary comparisons, especially as all the data exists electronically already.”
Women on Boards has widely championed the reporting initiative, saying that it will enforce transparency, and ensure that large companies address the issue and consider how inequities might be affecting talent retention.
Hathorn is clear that it does not need to be a negative process. She says: “Most organisations will find that once the data has been collated, it will enable them to improve their talent management. Importantly, it will also help the board identify areas of the business that are doing poorly and need support.
“Accepting the embarrassment of facing up to poor pay equity numbers in the short term is likely to pay off in long-term competitive advantage – organisations where pay and promotion are seen to be fair and transparent win big when it comes to attracting and retaining top talent.”
Filling the awkward silence
Of course, as an employee, what you look at is your pay packet, insofar as you are not getting a pay rise – rather than the business justification for why that is.
Whether it is a gender gap that the business is taking measures to close, or a pay freeze that is being compensated for with better pension contributions or a health cash plan, it is crucial that employers are open and transparent with their staff. Employees need to understand how their pay has been determined and how they are being otherwise rewarded and looked after by the company.
“Making sure employees know about all of the benefits that are available to them is one of the first, and most important, ways to make sure you get the most out of your benefits spend,” says Attwood.
“The one place where employers always fall down is on communicating benefits, and it’s so important that if you’re providing something, your employees know the entire benefits packages that they’re entitled to.”
And the key role of the line manager should not be underestimated: these are the people who are at the forefront of the discussion of talent management, pay and benefits with their teams – they need to be equipped with the business reasons behind these conversations.
“Line managers have to be empowered to make and communicate pay decisions,” reinforces Thomas. “This could be making sure that they’ve ways to assess talent within the organisation, and also the value of future talent to an organisation, moving away from a traditional pay-for-performance to a pay-for-talent approach.”
Brexit Britain and precarious pay
So what does the near future hold for UK pay, in between all this legislation, inflation, and EU-exiting negotiations?
The TUC’s Bell remains positive. “Over the past year interest has been starting to rise in issues around working life – this suggests that people are getting to the point where they think ‘work life shouldn’t be like this’,” she says. “It can’t just be a continued pay squeeze, and a sighed ‘sorry, we can’t afford it’, and a continued downgrade in terms and conditions.”
To hit the predicted 60% of average earnings and reach £9 by 2020, the NLW will need to keep increasing by around 5% per year if government targets remain at their current levels – but employers may also need to do more to recruit and retain top talent, whether that is through competitive pay or benefits.
“Obviously there are worrying headwinds, as we’ve got the uncertainty around Brexit as well as higher inflation,” Bell says. “But the government needs to make sure that businesses don’t start to worry about whether they can invest. It shouldn’t mean that working people lose out.”