Market pay supplements: sticking plasters or longer-term solutions to recruitment and retention pressures?

Whilst conducting research this summer on behalf of the Office of Manpower Economics (OME), we spoke to public sector organisations about their use of market pay supplements or recruitment and retention payments (RRPs). We heard comments to describe pay supplements, such as:

‘A sticking plaster that doesn’t stick.’

‘An action of last resort.’

 ‘A short-term fix.’

However, despite these reservations, a context of a tightening labour market, historically low levels of unemployment and continuing restrictions on public sector pay increases have encouraged the use of market pay supplements and RRPs.

Our summer study aimed to assess the effectiveness of these supplements; and to better understand how the processes of their management and use can impact their effectiveness. We conducted 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 supplements for these populations.

Of course, there is nothing new in the use of market supplements in the public sector for hard-to-recruit and retain roles. Supplements range from: incentive payments in schools, amidst headlines of ‘bidding wars’ and high rates of turnover, to maths teachers (a £25,000 bursary to train) and language teachers; to retention payments for public protection teams in the police; and to recruitment and retention (and ‘trade’) supplements in the armed forces of up to £21,000 for pilots and other specialist technical, IT and engineering posts. In the Armed Forces, there were in fact 16 different categories of RRP in 2016 costing around £107m. Elsewhere, in the NHS, we have seen a national supplement for hard-to-recruit specialities introduced in the new junior doctors’ contract, and a new GP specialist training flexibility payment to try and address the shortages of GPs that is evident in some parts of UK.

Despite these headlines, our study found surprisingly little quality academic research on the role of supplements and financial incentives to address skill shortages and recruitment and retention issues. There was also a notable lack of research evaluating the effectiveness of these payments. The existing evidence also threw significant doubt on the ability of financial payments to genuinely influence rates of recruitment and retention for specialist and in-demand staff and skills.

Evidence from the education sector and armed forces highlighted the importance of both intrinsic and extrinsic rewards in the design of policies to recruit and retain. Indeed, a forthcoming review by Kings College London and IES on the role of financial and non-financial incentives in recruitment and retention similarly concludes ‘that no one approach will be effective and there is no magic bullet. Rather, both financial and non-financial incentives have to be geared to the context and to the individuals in question.’

The evidence from our study on behalf of OME also suggests that market pay supplements may generally be more effective in recruitment- rather than retention-driven situations, whereas in some employers we see such supplements used as though they are equally effective in both scenarios.

Our case study research found that the situations and settings and the aims and nature of these payments vary enormously across sectors and roles. However, a number of common factors supported the effective use of the payments. These included:

• The constraint of national pay structures, for example, in the NHS and local government, with limited ability to reflect market differences in base pay.
• Clear criteria and goals of usage, in the form of a business case, and regular monitoring and review of the supplement’s operation.
• Tight targeting on specific groups, for example, our case study research showed some organisations applying RRPs to technical architecture, IT design, and system engineering roles rather than to all IT positions, with effective guidelines and controls to ensure that the supplements are operated in the manner intended.
• Use as part of wider, parallel initiatives on workforce planning, careers, training and development and talent management to address the defined staffing issues.

Our study concluded that market supplements are neither universally successful nor unsuccessful, good value for money nor a poor return on their cost. Used selectively, with strong targeting and operation of detailed control processes alongside comprehensive evidence to justify a supplement and annual renewal processes, there is evidence of some positive impact from using such payments. However, despite the widespread existence of skill shortages and many UK employers experiencing recruitment and retention issues, there has not been any significant growth in the use of supplements in response to the tightening labour market.

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Review of the use and effectiveness of market pay supplements: project report

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