Pay awards in 2023: the end of the going rate?

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1 Mar 2023

Dr Duncan Brown, Principal Associate

Follow @duncanbHR

The Covid-19 pandemic, immediately followed up by the almost-equally remarkable Ukraine-invasion-driven, almost-doubling of inflation last year (from 5.5 per cent 12 months ago to a marginally reduced 10.1 per cent in recent ONS stats), have well and truly blown away the somnolent, market-matching world of (low) pay setting in the UK’s 2010s.

But what will replace it? As the nurses suspend their planned strike action to enter into discussions (at last) with the government, how can you set, agree and distribute pay awards in the current highly volatile climate?  

Too much and unaffordable?

Pay too much and, as the government reminds the striking NHS staff groups, rail workers, teachers and all with monotonous frequency, we will be into 1970’s-style runaway ‘stagflation’, which would decimate everyone’s living standards. Somehow they curiously forget the recent ONS data release showing record year-on-year falls in our real earnings – of 3.1 per cent in total pay, even more in the public sector. As Chancellor Jeremy Hunt reportedly put it, ‘Any pay deals must be within existing departmental budgets and not fuel inflation further…current union demands are unaffordable’.

‘I would love’, Prime Minister Sunak told the nurses, to fund their ‘massive’ pay claim. Conveniently ignoring the growing evidence that nurses and many other UK employees already can’t afford both the food their families need to eat and energy to heat their homes in order to survive. Half of NHS trusts are already providing or planning their own food banks for staff.

And ignoring the 15 per cent settlement deal he signed off late last year for the striking criminal barristers, which is only just below the original 19 per cent claim of the Royal College of Nurses, designed to make up for this level of cumulative cuts in real pay since 2010. The junior doctors have recently voted overwhelmingly for strike action in search of ‘full pay restoration’ of the 26 per cent cut in their real pay since 2008.

Too little?

Pay too little though and, as veteran board chair Rick Haythornthwaite said recently, ‘you are risking losing the best you have: it is a big danger’, with continuing ‘tight labour markets and a rush to secure top talent’ meaning that ‘the highest earners are demanding even greater pay’.

Police officers aren’t the highest earners; and nor do they have the nurses’ or rail workers’ current freedom to strike. But National Police Chiefs Council, the Police Superintendents Association and the Police and Crime Commissioners Association warned jointly that real-terms cuts to police pay (of 17 per cent since 2010) were ‘undermining the impact of a continuing recruitment drive amid collapsing morale and high staff turnover’. PSA President Paul Fotheringham said the pay situation was creating ‘serious concerns about the future of UK policing’. 

2023 awards

So how do you set pay levels in 2023, achieving a ‘goldilocks’ level of award so as to avoid the twin-dangers of bankruptcy or strike action? XpertHR’s prelimary analysis of January awards on its database found an average increase across the economy of 6 per cent, which I suspect will come closest to becoming a ‘going rate’ across the economy this year.

However, rather than simply following any attempt to discern a ‘going rate’ of market increase, based on my recent experiences I would recommend that you consider looking in the following directions for pay enlightenment in such a foggy and unpredictable climate:

1. Look inside not just outside. The barristers’ 15 per cent, BT’s flat rate £1,500 averaging 16 per cent, or the 3.1 per cent average increase across the power and water companies in the last twelve months? Huge inter- and intra-sector and occupational variations indicate that a uniform market rate is dead, at least for now. So look internally at your own employer’s financial position, as well as the profile and needs of your workforce. 
2. Look downwards rather than upwards. Many recent awards were rightly skewed towards lower-paid workers who are suffering most from this inflationary squeeze. Additional awards last year at Virgin Money and NatWest for example, applied to those earning less than £30,000 - £35,000. This emphasis needs to continue.
3. Look medium-term not just short-term. Weirdly, the greater the uncertainty and unpredictability, the stronger the mutual benefits to employers and employees of guaranteed increases in their pay over more than twelve months. My IES colleague Steve Bevan makes a cogent case for multi-year deals and the Health Foundation sees this as a potential solution to the nurses’ pay issues.
4. Look beyond base pay. Setting the right base pay level is critical as the foundation for your reward strategy. But we have seen excellent examples over the past 12 months of employers and their unions coming up with additional, creative ways to improve the standard of living and security and welfare and wellbeing of their employees. 

‘And all for love, and nothing for reward’

The government may have been hoping that Edmund Spencer’s famous quotation from The Faerie Queene was still a viable employment model for their public sector employees. But Covid-19 and the inflation-driven, cost-of-living crisis have blown away the cosy, employer-driven, market-wagon-train-following, low-pay model that so many employers followed over the previous decade.

Rather than recommending the 5 per cent to 6 per cent rate that appears to be where the majority of April awards are settling, I have instead recommended that employers adopt a broader and more thoughtful, tailored approach to pay setting. The joint statement issued by the government and RCN on the eve of them entering into ‘intensive talks’ said:

’Both sides are committed to finding a fair and reasonable settlement that recognises the vital role that nurses play and the prime minister's priority to halve inflation’.

Employers and HR professionals would do well to adopt a similar balanced, tailored and participative approach to their pay review in 2023 and beyond. 

If you would like to discuss any issues around pay and reward strategies our consultants are here to help, contact: askIES@employment-studies.co.uk

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