Reward strategy 2022: from profit and cost-focus to prosperity, proper pay and compassion

Blog posts

12 Oct 2022

Duncan BrownDr Duncan Brown, Principal Associate

The cost of living crisis: how should employers respond?

Given that price inflation is running at 9.9 per cent and earnings increase at an average of 5.3 per cent, we have just had the quarter with the largest fall in real wages and household disposable income (and living standards) ever recorded by the ONS in this country, of 1.2 per cent. Adecco found that 61 per cent of the 34,200 workers across 25 countries it polled for its Global Workforce of The Future 2022 report highlighted COL and inflation as major concerns, and most concerningly for employers, a driver of higher turnover as they sought higher pay elsewhere.

The discussion and insights from our IES HR Directors’ Annual Retreat, which saw a welcome return in-person in the last week of September, confirmed that this is perhaps the major issue for HR and reward leaders to address right now. And it raises questions going way beyond the obvious ones of whether and how best to compensate our affected employees, down to our underpinning philosophies of people management and how best to achieve high and sustained performance in our organisations.

Sure, at the Retreat we had a good debate on the immediate compensation front. This highlighted the evident employer response cycle we are seeing develop, as the queues of mostly people-in-work at the foodbanks (latest forecast 2.7 million workers this year by the Living Wage Foundation) and the estimates of child poverty numbers (a record 37% of all children according to the Resolution Foundation) grow ever longer and bleaker.

Hardly surprising perhaps that food retailers including John Lewis and Sainsbury’s are making free food available to their employees in their busy run-up period to Christmas. As Tesco chief executive Ken Murphy put it last week, 8 per cent pay increases for their frontline keyworkers this year were driven by ‘trying to ensure that our colleagues don’t have to go to foodbanks’ (even though the resulting lower profits saw their share price fall to a six-year low).

A growing number of similar, responsible employers and those at our HR Retreat appear to have progressed from offering financial wellbeing support to hard cash. As REBA’s Debi O’Donovan observes, ‘employee wellbeing initiatives got us through the Covid crisis and financial wellbeing strategies will get us through the COL crisis’.

14 per cent of employers according to a survey published last month by Partners& have made lump-sum emergency cash payments. These include Virgin Money, Beazley insurance and Barratt Homes, with another 19 per cent of firms considering them.

As inflation escalates further, we are seeing employers progressing into making additional and higher base pay awards. Banks such as Santander (who made an additional 4 per cent pay award for those earning under £35k) are being followed by firms in the sectors experiencing the most severe labour shortages, such as retailers like Tesco and Aldi (a second pay award this year is due shortly, making for a 10 per cent annual increase in total).

The real question: a high or low investment route to high performance and prosperity?

But the deeper question raised by the current situation is just why so many employees are unable to deal with this economic ‘shock’? Kate Bell, the head of economics at the TUC, observed that while ‘Of course workers will take any form of help they can get this winter, the only real way to give working families security is a decent pay rise.’

What many HR functions actually gave their workers during the 2010s was of course ‘flexibility’ for their employers, which translated into insecurity for their employees. The so-called ‘jobs miracle’ largely saw growth in low-skilled, low-paid, low-security, low-HR-investment jobs and employment.

The ensuing pandemic highlighted the essential role and often awful pay and conditions of front-line workers, for example in care and retail, and the short-sightedness of the unfortunately common cost-efficiency and shareholder-return-driven cuts in employee benefits, such as sick pay. As Professor Sir Michael Marmot quoting Camus expressed, “pestilence brings the hidden truth of a corrupt (and divided) world to the surface.’

Is that really the way to high profits and performance? As our entertaining guest speaker at the IES Retreat Perry Timms highlighted, HR professionals need to go on the offensive now, on the back of their ‘Covid dividend’, supporting purpose, prosperity and the triple-bottom-line of people/planet/profits in their HR and reward agendas. It’s a great-sounding philosophy Perry. But what does this actually involve for our HR and reward strategies?

IES Director Tony Wilson highlighted the need for genuine supply-side investment by government in skills and support for the ‘economically inactive’(especially the over 50s), to address our long-standing low-productivity problem. Similarly, REC’s Neil Carberry argued strongly to our delegates for the need for them to ‘grow (more of) their own’ and invest in the critical line management and cultures that underpin employee retention and performance.

A stronger emphasis on delivering fair pay and employment, including pay progression for all employees, stable contracted hours, more comprehensive, compassionate financial wellbeing support - these were the themes most commonly raised by the research and case examples we considered at the Retreat to achieve sustained high performance and productivity.

We were perhaps ‘preaching to the converted’ in Brighton on the prosperity/purpose/people-investment route to high performance. But the signs are that this message is at last starting to spread more widely. The number of Living Wage Foundation-accredited employers for example, has almost doubled since the start of the pandemic to over 10,000, the number of employee-owned firms similarly to over 1,000.

Reward strategies in 2022 and beyond: from profit to purpose, cost to compassion   

Christian Kaberg, MD of the St Pancras Hotel Group, told the Financial Times that, ’It’s easy to blame this on the pandemic or Brexit …but the industry is experiencing staff shortages that are partly self-inflicted’. He concludes, ‘As an industry and an employer, we need to start doing the right things — one of them is paying people properly’.

The HR leaders at our Retreat will hopefully now be pushing at far more open boardroom doors in pursuit of the necessary investments in people, their development and their pay and wellbeing which underpin sustained high-performance organisations and economies. Rather than having to break down the traditional corporate rhetoric of supposedly performance-driven, cost-efficient and market based-rewards. The COL crisis is highlighting that they aren’t.     

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