Market pay supplements in the public sector

Newsletter articles

21 Dec 2017

HR Insight Issue 25

Catherine Rickard, Senior Research Fellow

With case-study insights, new in-depth research by IES for the Office of Manpower Economics (OME) examined the use and effectiveness of market pay supplements and Recruitment and Retention Payments (RRPs) across the Pay Review Body Groups and wider public sector.

Our latest study for OME used a rapid evidence review across the public sector, stakeholder interviews and six case studies covering nurses and IT workers in the NHS, nurses in the armed forces and social workers in local government, to examine policy and practices on the use of market pay supplements. The research also aimed to understand how the processes of their management and use can impact on effectiveness. The focus of the research was on distinct cash payments made to address recruitment and retention issues for particular occupations, jobs and/or skills.

Of course, there is nothing new in the use of market supplements in government and across the wider public sector for hard-to-recruit and retain roles. However, a context of a tightening labour market, historically low levels of unemployment – likely to be further impacted by Brexit and the supply of EU workers – and continuing restrictions on public sector pay increases, have encouraged the use of market pay supplements and RRPs for some public sector workers.

However, divergent views, practices and trends are evident across the different Pay Review Body employee groups and the wider public sector in terms of the desirability, use and efficacy of market and skill supplements and RRPs. Indeed, in 2016 in the Armed Forces there were 16 different categories of RRP costing around £107m and the Armed Forces Pay Review Body noted in its 2017 report that ‘MOD should be more proactive’ in using market supplements.[1] The NHS Pay Review Body also ‘continue to believe that RRPs are an important flexibility’[2], although the total cost of RRPs for non-medical staff in the NHS has reduced by 74 per cent since 2008/09, from £57 million to £15 million in 2015/16.[3]

Our research found that the situations and settings and the aims and nature of these payments vary enormously across the populations we studied. However, a number of common factors supported the effective use of the payments including:

• the presence of severe and generally long-established and evident skill shortages and recruitment and/or retention issues;

• the constraint of national pay structures with limited ability to reflect market differences in base pay;

• clear criteria and goals of usage, and regular monitoring and review of the supplement’s operation;

• tight targeting on specific groups with effective guidelines and controls on usage to ensure that the supplements are operated in the manner intended;

• good availability of external market and internal HR data;

• use as part of wider strategies and actions across the HR and employment field to address the defined staffing issues, typically encompassing workforce planning; career management; recruitment; and training and development, in order to boost the supply of staff;

• HR, line management and staff involvement in the development of the supplement to ensure understanding of both the logic for, and the practicalities of, the supplement operation; and

• co-operation with other employers locally to avoid escalation in supplements and costs.

Our study also highlighted some key practical implications, particularly based on the experiences and advice of our case study employers. For example, the study stressed that recruitment and retention problems are not the same. A small-ish RRP might work to attract, but may not be sufficient to retain. Generally there is a need for differentiated measures within an overall HR and reward strategy to address the two separate issues.

Also it is necessary to distinguish between difficulties which are caused by a shortage of supply and those caused by an inability to attract a fair share of recruits. There needs to be a much wider employment strategy addressing supply issues, combining reward (typically with financial and non-financial components), resourcing and capability-building elements.

Our research concluded that despite the widespread existence of skill shortages and many UK employers experiencing recruitment and retention issues, we have not seen significant growth in the use of supplements as a ‘knee-jerk response’ to the tightening labour market. Their use is, in fact, still twice as common in the private sector than the public sector. Employers and policymakers have perhaps learnt the lessons of the past and understand the risks of these payments – namely that they risk becoming permanent and can drive ‘tit-for-tat’ escalation in supplements and costs between competing employers. Our research suggests that employers have mitigated these risks by being highly selective in their introduction and usage and also well controlled and managed in their practical application.

Funding issues have also played a part and we found detailed control processes operating, requiring comprehensive evidence to justify a supplement, with annual renewal also featuring. Overall, used selectively and with strong targeting, there is evidence of some positive impact from using supplements, particularly in a lump sum form.

The report

Brown D, Reilly P, Rickard C (2017), Review of the use and effectiveness of market pay supplements: Project report, Office of Manpower Economics (OME)