In the usual ‘new year’ fashion, here’s my thoughts on what’s on the horizon for reward in the year ahead.
There really is a lot happening right now. But I’ve picked five key themes and made some suggestions of what can be done to make reward more effective.
The UK is set to have the worst wage performance of any advanced economy (TUC). Real wages (pay adjusted for inflation) lower than before the financial crises in 2008 are expected.
Increased investment in pay is urgently needed. The National Living Wage will force our hand to some extent. An increase 4.4% to £7.83 is planned for April 2018, and this will have a ‘trickle’ up effect to other levels too.
This is in addition to pension auto-enrolment which will increase to 2% for employers, and to 3% for employees, from April 2018. This won’t improve real 'wages' but it is a pay cost that will need to be communicated well to be seen to have value.
It’s good to see an increased focus on market rates (CIPD). Allowing salaries for to slip behind market due to minimal annual pay increase budgets affects fairness, trust and retention (UK employees are more likely than European ones to change jobs for a pay increase, ADP UK). So, ensure you have sound market intelligence to inform considered annual pay budgets.
Complex world of work
The world of work is becoming more and more uncertain and complex. This is bringing a more agile approach to job evaluation, pay and benefits. Progressive reward teams will support line manager decisions rather than attempting to replace their decisions with a formula.
Traditional job evaluation is evolving. Not only do 63% not understand them (eReward), pseudo-scientific points-factor systems are no better than having no system at all (Duncan Brown, IES). In my experience, many clients are benefitting from broad, transparent and tailored job classification.
I also see pay-setting evolving. Given the complexity of roles and people, managers are best placed to make full and informed decisions about pay. This ‘holistic’ approach takes account of many aspects of the role (e.g. market rate, internal level, additional responsibilities) and the individual (e.g. performance, contribution, potential).
Contracting workers through the gig economy also calls for more agility. Expect to make more individual, tailored pay decisions based on market rate rather than internal equity. And there’s opportunity for bonuses linked to project outcomes rather than the financial year, and providing cash to fund self-managed benefits.
Executive pay scrutiny
Concern about executive pay levels is growing and 71% of workers feel CEO pay is too high (CIPD). Despite recent pay restraint across the FTSE companies (WTW), the gap between CEO and worker is still wide at 120:1 (High Pay Centre).
The revised UK Corporate Governance code has been proposed and is expected this summer. It includes a requirement to disclose and justify pay ratio between CEOs and average workers. Calculating and publishing this ahead of time will show commitment to transparency and action, and enable integrated communications with gender pay.
Part of that action will require those with Remuneration Committee responsibilities to challenge excessive and unjustifiable pay. This will require an informed perspective based on sound market data and financial/non-financial performance metrics.
Gender pay reporting
Gender pay reporting regulations came into force in 2017, and the final deadline for publication is just three months away.
The best reward teams will see the regulations as an opportunity for change rather than a risk to be managed. They will be making the case for better MI systems, developing clear and compelling narratives, and creating internal dashboards to provide insight into equal pay, gender pay, pay ratios, social mobility and market position.
New perspective on engagement
The pace of change in the world of work is threatening our basic need for fairness and trust. This is increasing our desire for clarity and transparency, including on the emotive topic of pay.
In the 2017 Employee Engagement study (Aon Hewitt), the top opportunity to drive employee engagement is reward. Putting in place robust and transparent foundations to firmly establish ‘fair pay’ has never been more important. Over 2/3 of employers are transparent about pay (CIPD) and our short video explains what’s needed.
Gender pay reporting and CEO pay ratios may be a step in the right direction, but they bring new challenges too. These blunt measures have the potential to shout ‘unfair pay’ unless very carefully explained and communicated.
But it doesn’t stop there. A ‘fair’ deal is about taking pay off the table, creating a culture of recognition, and delivering a great employee experience.
I hope this helps your thinking. What’s becoming increasingly clear to me is that reward is no longer just for specialists. Our recent RewardReady Workshops, aimed at improving reward capability for all HR professionals, started selling out within days.
It’s definitely time to take stock and ensure you are ‘reward ready’ for business success in 2018 and beyond.