This is not going to be news to anyone, but there’s a cost-of-living crisis at the moment!
The news is everywhere and it’s setting some interesting expectations with employees when it comes to pay increases for 2023.
We’ve had lots of questions from our clients regarding what is happening in the market in relation to pay increases for 2023. In this post, we’re going to explore some of the trends we are seeing.
Time to read our post: 5 minutes
The questions answered in this post are:
1. What Percentage Pay Increases Are Businesses Awarding in 2023?
This is the most common question that we hear. The answer is “it depends” and “no one really wants to say”.
There are some data points available. For example, some larger companies and public sector organisations will publish their salary increase levels.
From this information, a couple of the themes that we’re seeing are:
- Some large corporates can award lower salary increases with limited risk to their ability to attract and retain talent. Simply by being the leader in their field, they are able to get the people they want and need.
- In addition, salary will likely be a smaller part of an overall package. There will potentially be more extensive benefits packages that offer support to their employees in different ways.
- Other large corporates have not performed well in recent years and are simply unable to offer large salary increases.
- They are really in the same position as many of our clients. They need to ask the questions “What would we like to do?” and “What can we afford to do?”
Whilst these are potentially useful data points, what large corporates can do is very different to what many of our clients are able to do.
In terms of sources of information to help inform the decision that you make about salary increases for your business, we would direct you towards the Office of National Statistics (“ONS”). The ONS issues monthly updates on average weekly earnings and this sets out wage growth rates.
The latest salary information from the ONS was released on 15 November 2022 and states for the period July – September 2022:
- the average total pay (including bonuses) grew by 6% and the growth in regular pay was 5.7%
- the industries currently seeing the largest growth in regular pay are wholesaling, retailing, hotels and hospitality. Here growth rate is at 7.3%.
- This could well be a result of not only the cost-of-living crisis but also the significant skills shortages facing these sectors.
Typically, what we are seeing in the market are pay increases for 2023 in the region of 4% – 7%.
Another approach that we are seeing is higher percentage increases being given to lower paid employees. While everyone feels the impact of the cost-of-living increase, lower-paid individuals, who might have already been struggling to live on their salary, are facing some of the biggest challenges.. Offering more support here can be a sensible approach.
2. What About One-off Cost of Living Bonuses?
You will also see some news headlines regarding companies offering one off “Cost of Living” bonuses.
There are pros and cons to this approach.
Employees will welcome all money. However, unless you are in the position to pay bonuses into the high thousands, a one-off bonus, after tax has been deducted, will likely be gone very quickly and will unlikely make much of a dent in the month-to-month cost issues that employees are facing.
Of course, a bonus paid just before Christmas will always be helpful and appreciated. However, we would urge caution in labelling this as a “cost of living bonus”. Cost of living is an ongoing challenge for many people. A one-off bonus is not going to make up for the fact that their salary doesn’t go as far as it used to.
If you do decide to award cost of living bonuses, do be very clear about the reasons for the award. Also, be sure to manage expectations around whether this is something you will be doing in future.
Consider what you’ll do if cost of living continues to increase. Are you going to pay further bonuses across 2023? If not, make it very clear that this is an exceptional, one-off payment.
3. We Usually Give Increases Linked to the Consumer Price Index. We Can’t Afford That. What Can We Do?
The most important thing to do is to start communicating about 2023 pay increases to your employees now.
The longer you leave it, the more set employees will become on the fact that they are going to receive a 10% or 11% salary increase.
Don’t shy away from delivering a direct message explaining that it would be irresponsible to offer such high increases. You can set out some of the ways that the current economy is impacting the business as a whole. You can explain that you need to be fiscally responsible in relation to salary increases to ensure job security for the long term.
There is a difference between “we usually give increases linked to CPI” and “we are contractually obliged to give increases linked to CPI”. If your employment contract states that you will award annual salary increases linked to CPI then you need to seek legal advice if you are not going to be able to honour that contractual commitment.
4. Are There Any Other Ways to Support Our Employees?
The government is running a range of schemes to support people with the cost of living. It’s worth ensuring that your employees are aware of them and are getting any additional support to which they are entitled.
As a business, there are additional things you can consider. You’ll need to assess what is feasible for your business.
Options could be:
- Negotiate discounts with local businesses – see if there are local businesses that would be willing to offer a discount to your employees. This could bring them additional customers so it may well be something they would consider doing.
- Look at available salary sacrifice schemes – salary sacrifice schemes can be operated for pension contributions, cycle schemes and electric car schemes. These schemes offer an employee the opportunity to pay for products from their gross rather than net pay. This means there are tax savings.
- Season ticket loans – these are less relevant now with so many people adopting hybrid working. However, it’s worth considering offering season ticket loans if you are a business which requires full-time attendance at a place of work.
- Look at hybrid working models – it’s likely you’re already offering this but look at offering more or indeed fewer home working days. More home working days will lead to a decrease in commuting costs but will likely lead to an increase in utility bills. Fewer home working days will be the reverse.
- Contribute to home working costs – under HMRC rules, you can contribute to additional household expenses that are incurred because of home working.
- We are not tax experts so we are not going to comment on what you can and cannot do but there is information available on the HMRC website on contributing to homeworking costs. You can seek advice from your accountant or finance department.
Want to Know More?
These are just a few ideas and we’ve focused on those that are low cost to businesses. If you’ve got the money to go all out on employee benefits, you’d likely be giving your employees a larger salary increase in the first place!
These are difficult times for everyone. If you would like to talk about any employee issues that you are facing or would like to review your overall approach to reward then please do give us a call on 0203 319 1649 or contact us using the contact form.