Can more multi-year pay deals calm our industrial relations climate?

Blog posts

5 Jul 2022

Stephen Bevan 
Head of HR Research Development 

Follow @StephenBevan

When many UK workers look nervously at their pay slips and then at their energy and food bills, it’s easy to see why they might feel that they are running fast to stand still. After a decade of close to stagnant real wage growth, the messages from those in charge have been contradictory at best. Do we aspire to be an economy where the emphasis is on high skills, high pay and high productivity? Or should workers lower their expectations of getting pay rises which they hope will compensate, at least a little, for what journalists used to call ‘galloping’ inflation? After all, they are told, expecting their pay to keep pace with inflation risks bankrupting the economy or pricing themselves out of their jobs?

Part of the problem is that the environment for pay setting and collective bargaining is so fluid and febrile at the moment. This is because good estimates of where Consumer Price Index (CPI) inflation will end up (and for how long) are very hard to pin down. For example, in guidance to the public sector Pay Review Bodies (PRBs) in December 2021 - just seven months ago - the Treasury estimated that CPI inflation would peak at 4 per cent in 2022. It reassuringly expected this peak to be only temporary as the Bank of England's efforts to hit its 2 per cent target began to bear fruit. Well, here we are in July 2022, with CPI inflation now over 9 per cent and inflation-adjusted pay in the first quarter of 2022 having fallen by 1.2 per cent.

It's perhaps no surprise that the recommendations of the independent PRBs, and whether the government will accept them, are very keenly anticipated. Nor is it so shocking that the collective bargaining temperature in several other key sectors such as rail, air transport, legal and postal services is rising. This is often made more complex by some employers seeking to link pay rises to reforms in working practices as part of the traditional ritual dance of annual pay bargaining.

But perhaps one of the structural problems of the bargaining landscape at the moment is that an awful lot can ride on getting a mutually acceptable deal agreed which spans just one year when the level of inflation is so volatile. For example, if an employer settles at 7 or 8 per cent today but CPI falls to 4 per cent by December then they are bound by the deal to be paying what they may consider ‘over the odds’ for the next year. Similarly, if a union settles on 4 to 5 per cent now but CPI rises to 11 per cent - as some are forecasting - by the end of the year, they will have signed off on a 6 to 7 per cent real terms pay cut for their members. As you can see, collective bargaining at such a time has more than the average amount of jeopardy built into it for all stakeholders. Perhaps the time has come for the more widespread adoption of multi-year pay deals? Let’s take a look at some of the potential benefits.

One immediate benefit is that, when it is proving hard to predict where CPI inflation will ‘top out’, multi-year deals can be constructed that pitch the year one payment of a deal at a relatively generous level. The payment can then either be increased or decreased in subsequent years using ‘trigger’ clauses which depend on where the cost of living ends up. For the employer they can then have a much better ‘handle’ on the magnitude of their two to three year paybill costs. For employees, they have greater predictability over their incomes and a ‘buffer’ against an even steeper increase in living costs.

Another opportunity such deals offer is the chance to make changes to the pay ‘architecture’ over a longer period of time. For example, previous deals have included agreements to narrow pay ranges at the lower end of the grading structure. This can mean faster progression to the ‘rate for the job’ for the lower paid. Other previous deals have included agreements to raise the minimum point of the lowest pay scale to give a boost to the lowest paid by giving a higher percentage increase to this group. Others have sought to address pay inequalities and gender pay gaps over a two to three year period. Some deals also include provision to tackle other pay issues such as overtime working or unsocial hours payments. In normal circumstances trying to agree all of these changes and reforms would be too much for a single year deal, but the extra bandwidth created by multi-year arrangement can allow some longer-term adjustments and reforms to be tackled without these being crowded out by the pressure to agree a percentage increase.

Multi-year deals won't suit all circumstances. Yet some employers and unions have felt them to be worthwhile in the last couple of years, including in HMRC and the Ministry of Justice. My former colleague Professor Jim Buchan led a Health Foundation team looking at nurses pay just last month and concluded that a further multi-year deal could help bring about much needed changes to the remuneration of nurses at a time when recruitment, adequate staffing levels and talent retention are critical to the delivery of patient care in the already stretched NHS.

As things stand, it's hard to imagine that there won't be several more pay deal flashpoints between now and the end of the year. Multi-year deals by themselves will not diffuse this tension, but a commitment to consider their more frequent use in upcoming pay rounds might help both employers and unions to find a space for a more constructive and measured approach to pay determination, when the uncertainty over inflation is currently making industrial relations harmony more difficult to achieve.

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