As 2023 comes to a close, there is sustained business optimism with revenues expected to increase for 46% of respondents. This is consistent with falling inflation, which may prompt interest rate cuts. However, optimism is somewhat curbed because of the continuing cost of living pressures meaning that employees and employers alike face higher costs, in addition to the rising National Minimum Wage in April 2024.
Highest pay awards in a decade
The most common pay award for 2023 is more evenly split between those granting between 4% and 5% (43%) and those granting over 5% (30%). Pay levels have struggled to keep up with rising costs driven by inflation and years of constrained pay growth. This has resulted in the highest pay awards HR and Reward Consultancy Paydata has captured in the previous 10 years of running its UK Reward Management Survey.
While the median pay review in 2023 is 5%, employers anticipate that their median pay award will reduce slightly to 4.5% in 2024. The question of whether these pay awards are sustainable for another year will shape pay awards in 2024. In previous years, most respondents were split between up to 2% and 3%, with any pay awards above 4% being uncommon.
In autumn 2021, 9% of respondents reported operating a pay freeze. This has reduced to 2% in 2023, likely reflecting the wider economic landscape. None of the respondents to our survey in 2022 reported a pay freeze. Perhaps in reflection of the fact that pay had been stagnant for so long during the pandemic, compensation levels had to address these shortcomings during those unprecedented times.
Out of cycle pay awards skew official figures
Paydata also highlights the effect of additional ‘out of cycle’ pay awards that skew official pay figures. They have been monitoring the effect of out of cycle pay awards over the past few years. While 86% of respondents reported using these types of increases in autumn 2022, this has increased to 88% this year. 88% also anticipate using them next year, demonstrating their widespread use.
Traditionally reserved for adjusting pay to reflect promotions, these types of pay awards have been increasingly used to supplement the constrained pay awards that were offered over the past decade and reduce the economic impact of these on employees. The awards have also served as a recruitment and retention device.
Around one in five report that their out of cycle pay increases account for up to 1% of their annual pay bill. These types of sizable additions to pay awards every year does raise questions about the accuracy of the ‘official’ pay award statistics for the year. The factors driving these types of pay awards range from market pressures, with inflation continuing to impact employees, to internally aligning pay, which is key to employee engagement where people want to know that they are being fairly paid for the work they are delivering.
Two schools of thought around 2024 pay awards
Tim Kellett, Reward Expert at Paydata says, “Looking ahead to 2024, generally employers are either worried about the pressures of inflation and the competition for key skills, and think they will need to make the same level of pay award again, or are flagging that they just cannot afford to award staff 5%, two years in a row. We hope the report supports employers’ evidence-based approach to defining an effective reward strategy for 2024.”
Pay pressures are being continuously shaped by varying factors, as employers try to balance affordability with retaining high performing employees with key skills. Many employers are hesitant to set a precedent and want to ensure that pay levels are sustainable. Communication of pay awards will be critical to whether people are supportive and accepting of new pay levels.
Being open and honest about how employers are striving to carefully balance their pay budgets with operational costs for the long-term sustainability of the business is an important message. This facilitates greater trust between employers and employees.