Bonus growth: a welcome sign of caring HR management or an ineffective sticking plaster for low pay?

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27 Jul 2022

Duncan BrownDr Duncan Brown, Principal Associate

More bonus, less pay

There was some good news and some decidedly not so good news in last week’s latest monthly pay figures for the year to May, published by the Office of National Statistics. On the positive side, in the tightest labour market with the lowest unemployment rate on record, average weekly earnings growth and annual pay awards are at their highest levels for over 20 years.

Annual growth is 4.3 per cent in the regular base pay measure and 6.2 per cent on the total pay measure, including bonuses and variable cash lump sum payments. The latter now comprise more than 7 per cent of the average earnings level. More people at all levels in organisations are getting more money in their pockets, with more eligible for and receiving cash bonus payments – at least in the private sector.

The bad news is they really need it, especially the lowest-paid. Price inflation has rocketed up from 2 per cent in the middle of last year to 9.4 per cent over the same period. In real terms (that is, adjusted for increases in inflation), the ONS estimates that total and regular pay both fell, to -0.9 per cent and -2.8 per cent respectively.

Public sector: no bonus, lower pay

The public sector has fared particularly badly in this recent real earnings decline, with average earnings growth of just 1.5 per cent. Real pay levels for the NHS workers have fallen by between 6 per cent (nurses) and 12 per cent (consultants) since 2010. According to the House of Commons health and social care select committee, England is now short of 12,000 hospital doctors and more than 50,000 nurses and midwives, indicating ‘the worst workforce crisis in NHS history’.

Private sector: recruitment and cost-of-living payments

The picture is varied, if still pretty bleak, in the private sector. In social care, where average earnings are lower than the NHS, there is an even worse staffing shortfall, with more than 150,000 vacancies. In response, the government made an additional  ‘workforce capacity fund’ of £120 million available last November for recruitment and retention payments by care providers. This has generated average one-off payments to recruits and staff of between £100 and £300 per head.

Signing-on bonuses have become more common across almost all areas of the private sector this year. The latest vacancy data from Adzuna shows that the number of jobs advertised offering bonuses has more than doubled since the start of 2021, as ‘employers seek to address their staff shortages without adding to their fixed pay costs’. BA for example, are currently offering a £1,000 sign-on payment for new ground staff.

The ONS’ bonus figures are also being boosted by the emergency cash payments being made by a growing number of employers, especially to their lower-paid employees, in order to help them cope with the particularly significant jump in petrol (42 per cent), heating (53 per cent) and food (9 per cent) prices.

Virgin Money announced earlier this month that on top of its annual pay award earlier this year, it would be making an extra £1,000 ‘cost-of-living’ cash payment to all of its employees earning less than £50,000pa. Insurer Beazley last month made a £3,000 one-off payment similarly to its lower-paid employees. 

These payments are spreading across other sectors, with an all-staff bonus payment of £2000 accompanying the 4 per cent annual pay deal at Rolls Royce for example. Housebuilder Barratt just announced a £1,000 payment for employees below senior management, recognising that ‘the rising cost-of-living is impacting on all staff’.

A new pay model? The need for change

In the short-term, it has to be a good thing that a growing minority of employers have followed the government in responding to what is a genuine cost-of-living crisis. But surely we should question why in the first place do employers need to give employees emergency cash handouts? Why don’t our employees earn enough to live on, with a measure of savings to see them through any short-term crisis? Why do so many employers have so many of their employees, as the TUC puts it, ‘one pay cheque away from poverty’?

The last decade saw significant growth in low skilled, low paid and casual employment and UK wage growth has been at the bottom of the OECD’s league table since 2007, alongside Greece, Italy and Mexico. A ‘toxic combination’ of low pay levels and real pay declines, married to comparatively high-income inequality makes for what the Resolution Foundation calls a ‘stagnation nation’ in terms of pay and productivity. Compared to France for example, our productivity is 15 per cent lower, our household incomes are on average 9 per cent below theirs, but our low paid workers are 22 per cent poorer than their counterparts there.

Not only is the UK economy characterised by low pay levels, but few employers operate the sort of pay and reward plans that correlate with high-performance, high-productivity management, including skills-based pay progression and all-employee profit sharing. IES’ work on careers and pay progression highlights the value which such an approach for lower paid employees can add to these employees, their employers and society. The association of profit sharing with company performance is recognised in France by the mandatory provision of such a scheme by larger companies.

Yet in many UK sectors we have seen exactly the reverse, driven by relentless cost-cutting and efficiency drives, repeated rounds of outsourcing and re-tendering. According to Skills for Care, in 2013 care workers earned 21p an hour more than retail assistants; and staff with five years’ experience 5 per cent more than new recruits. Last year the experience premium was down to 1 per cent and shop assistants on average earned 13p per hour more.

The future: high pay/high productivity or low pay and emergency handouts?

The New Statesman claims the government’s ‘plan for “high-wage, high-skill” Britain is falling short’. The recent example of P&O shows that the pay and labour cost-minimisation management model is far from dead in this country.

The question I would raise is have UK employers (and our government) really recognised that the failure to invest sufficiently in staff pay and their skills, career and pay progression just creates a poorer, low-skill, low-pay, low-productivity economy and country? Have lessons really been learned? Will the higher paid, higher productivity economy actually emerge?

Are these welcome bonus payments to lower-paid staff a step on the path to more permanent and higher investments in people and their productivity? Or simply a crisis-stop-gap to keep their employees alive, before returning their total pay to the statutory minimum wage level?

Last week Santander announced that the base pay of around 7,000 employees earning less than £35,000 will be increased by an additional 4 per cent to help them cope with fast-rising prices. Aldi this week raised pay rates for its shop staff for the second time this year to £10.50 per hour, above the rate of the real living wage and now totalling a 10 per cent increase for the year. Let’s hope such higher-low-pay and skills-pay-progression practices are the future pay management model for many more UK employers.

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