Back to the future: from pay benchmarking to Brexit-induced strategic HR planning

17 Aug 2016

Duncan Brown, Head of HR Consultancy

Benchmarking pay: how easy, how important?

We are well into market pay benchmarking season at IES, no quiet summer-holiday August for us. As employers start to prepare for their annual pay reviews in October or at year-end, and despite the continuing somnolent state of the salaries market, with a plethora of follow-the-competitors two per cent awards in the private sector and a one per cent cap continuing in the public, this appetite for market pay information appears as insatiable as ever.

But just how useful is most of this pay information and will it really help employers to recruit, retain and motivate a high-performing workforce? I would, with all due deference to my clients, respectfully raise a number of issues with this benchmarking obsession in HR circles. First, there is the issue of just how accurate the market comparisons and job matches really are at assessing pay competitiveness.

The Sun recently ‘blasted’ the ‘Bonkers Beeb’ for having over 5,000 job titles such as Thematic Research Manager and Solution Architect. The large HR consultancies have moved to increasingly standardised global remuneration databases and job catalogues, enabling you to deceptively easily (if not cheaply) extract market pay data at the push of a button. Yet the trend in organisation and job design in our increasingly knowledge, skills and person-based economy has been exactly the reverse. There is more tailoring and diversity of autonomous jobs in flatter organisations to suit the competencies, character and potential added value of each knowledge worker and creative.

Lionel Messi may wear the same shirt number and play in the same part of the pitch as your average League 2 midfielder. But their contribution and worth is massively different. In what economist, professor and Vice-Chairman of the BBC Trust Diane Coyle calls our ‘winner-takes-all’ economy, more and more jobs are like this, with a huge range in skills, contribution and pay increasingly evident for those badged with apparently generic jobs titles such as ‘Programmer’, ‘IT consultant’, ‘Project Manager’, ‘Editor’, ‘PR Adviser’ and even ‘HR consultant’ and ‘Business Partner’.

But even assuming that you can accurately match the jobs, individuals and employers to arrive at a truly comparative market figure, secondly we might ask what use is this information to delivering your HR and reward strategy? We know for a start that above a very low threshold, people tend to judge the fairness and adequacy of their pay in relative rather than absolute terms, most commonly making judgements relative to those nearest to them, in their own organisation.

As PwC pointed out in a paper on the contentious issue of executive remuneration last month, it doesn’t much matter whether people are accurate in thinking that FTSE 100 CEOs are paid £1 million or £5 million, what matters is that two-thirds of them think that it’s far too much.

But more fundamentally, are levels of pay the real driver, or just the symptom, of deeper issues of supply and demand in the UK, EU and global labour markets? And is it therefore these other issues and trends that employers should really be looking at if they are trying to build an effective HR and resourcing strategy for the future?

The drivers of labour supply and turnover

We recently helped an industry regulator to examine why their staff attrition rates had increased by 10 per cent over the last two years, when they had last carried out a pay benchmarking review. We updated this review, which showed a marginal decline in pay competitiveness, although the pay gap against the private sector was largely nullified in statistical terms by the richer value of their pension provisions. Useful information, but no help in explaining the increase in attrition.

For that we had to talk to staff in focus groups to understand their motivations and look at recruitment and retention trends more generally. What we found was no shortage or decline in the demand from very bright graduates to come and work for them out of university, and very high levels of intrinsic motivation from what staff regarded as interesting and socially important work. But perceptions of a lack of career prospects rather than just pay progression saw turnover rates spike after three to four years’ service to over 20 per cent, and other larger government departments and growing regulators are more than willing to provide these opportunities.

Our client’s response to this has involved faster pay progression in some areas, but is a much more all-encompassing, medium-term resourcing and retention plan, involving improved recruitment branding, the design of technical career ladders and improved line management and HR and reward communications.

Re-establishing workforce planning post-Brexit

Following the vote for Brexit, strategic planning seems set to be enjoying something of a renaissance, as the new Prime Minister immediately set about establishing a ‘proper industrial strategy’ for the UK and renamed BIS as the Department for Business, Energy and Industrial Strategy,

IES was founded almost 50 years ago, in a more optimistic but still industrial-conflict riven era, in part to address the lack of workforce planning shown by UK employers, which even then was recognised to be a major contributor to our poor productivity. Today, UK productivity lags our major international competitors more than ever , as Mrs May pointed out.

We still carry out many studies of labour market and skills trends for government departments and major public sector employers. For example, our recent research report for the Migration Advisory Committee highlighted the continuing and critical nursing shortages in the economy and, supporting your impressions from walking into any major hospital in London today, the essential requirement to maintain the flow of overseas workers .

The MAC recommended that nurses remain on the Government’s shortage occupation list, but also criticised employers in the health sector for failing to maintain a sufficient supply of UK nurses. The Committee said the current shortage of nurses is mostly down to factors which could, and should, have been anticipated: - including an ageing population, problems with staff training, pay and recruitment – all compounded by the squeeze on NHS budgets.

However, IES carries out relatively few workforce planning studies for employers today, certainly compared to the number of pay benchmarking exercises. And of course forecasting and planning ahead in today’s fast-changing and increasingly unpredictable climate seems a difficult, some might even say pointless task, in the face of such massive uncertainties and huge pressures on our leaders to deliver short-term results.

The EU referendum highlighted the potential for unexpected economic and social ‘shocks’. While the Prime Minister may assert that ‘Brexit means Brexit!’, attending some of the many breakfast briefings on offer last month just illustrated the continuing uncertainties about key strategic workforce issues: the future of EU nationals here; the nature of any future migration controls; changes to employment law; and the employee relations climate - never mind the uncertain economic outlook.

Yet, as the EU referendum vote has shown, surprising outcomes don’t mean that you can’t scenario plan, think ahead and initially plan for the unknown. For example, how you would deal with what in this case could represent a major restriction on a key portion of the labour force for many professional and financial services firms in London, coming from the EU.

In one of our early studies, over 25 years ago, we helped a large UK company to plan the shape of their future workforce in the face of the much-heralded ‘demographic time-bomb’. In fact, the economy went into decline and so the predicted shortages of younger workers did not emerge until much later. But they were much better placed to deal employment-wise with whatever the economy and competitors threw at them, having thought through and planned for different labour market situations.

Today’s improved HR data and massively faster economic analysis tools make the ‘what if’ planning a much easier task. Serge Colin, the group HR director of Tarmac rightly observed that Brexit has highlighted the need to focus on workforce planning, and that we should be ‘thoroughly listening to everything that is said, by politicians, or by the EU, to make sure we are fully prepared and ready to react when decisions are made.’ He went on to remark that ‘we must also continue to be very strategic - to build the future without waiting for this situation to resolve itself and prepare our capabilities for tomorrow.’

Doing a bit more, therefore, than just market pay benchmarking...

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.