Strengthening pay pressures are likely to result in higher pay rises for many staff in 2022 as organisations endeavour to return to business as usual in the aftermath of the pandemic, according to the latest survey of employers’ reward intentions.* And with increased focus on the relationship between pay and the cost of living, some workers could stand to receive increases in a range of 3% to 6%, higher than seen for many years, based on the latest forecasts.

Key findings the survey

• Half of employers anticipate awarding higher increases to staff in 2022 compared with this year (the same survey a year ago found half of employers were expecting to make lower awards this year)

• Recruitment and retention challenges are placing far greater pressure on pay this year – due to the tighter labour market in the wake of the economy reopening, but also difficulties with certain roles such as technical/IT specialists, engineers, operational specialists (eg compliance/health and safety roles) and HGV drivers, call centre operators and customer service advisers

• Almost three-quarters (74%) of employers are currently finding recruitment either very or fairly difficult, while just over half (51%) report difficulties with retention – a marked increase on 2020’s findings

• Employers are taking a keen interest in other organisations’ pay practices: 71% cite ‘higher pay on offer at competitors’ as the most common reason for retention difficulties and 87% plan to benchmark their pay levels against the market in 2022

• Cost-of-living concerns appear to be taking on greater significance in pay setting: 69% of employers say they refer to a formal inflation index when determining pay awards, compared with 52% a year ago.

• Just 16% of respondents anticipate that next year’s pay award will fall below the level of the CPI/CPIH and some benchmark their awards against the usually higher RPI measure of inflation – based on the latest forecasts, this could result in increases in a range between 3% and 6%.

Next year’s pay rises set to match or exceed 2021 awards

The results from the latest in IDR’s annual ‘Pay Planning’ survey series found that exactly half of employers anticipate awarding higher increases to staff in 2022 compared with this year, while the majority of the remainder (43% of the sample) expect that staff will receive similar pay rises to this year. Just 7% of respondents say that their 2022 pay awards are likely to fall below the level of those made this year. This represents a marked contrast with IDR’s 2020 survey, when half of organisations thought that this year’s pay awards would be lower than the year before.

While affordability and future business outlook are still the most commonly referenced factors influencing pay awards, cited by 96% and 88% of organisations respectively, recruitment and retention difficulties have risen sharply in importance, up from 49% in 2020 to 70% this year.

Some 74% of employers signal that they are currently finding recruitment either very or fairly difficult, while 51% report difficulties with retention. This is a marked increase on 2020, when only 24% reported difficulties with recruitment and fewer than 10% reported difficulties with retention.

Many are experiencing a shortage of skilled or qualified candidates, with organisations across all industries reporting difficulties in recruiting or retaining technical/IT specialists, engineers, operational specialists (eg compliance/health and safety roles) and HGV drivers. Additionally, several respondents indicate that entry-level, customer-facing roles such as call centre operators, customer service advisers and retail staff present a particular retention challenge.

Many respondents feel the reward packages offered by other employers are exacerbating problems with staff retention: ‘higher pay on offer at competitors’ is by far the most common reason cited for retention difficulties (71% of respondents), which likely explains why many more employers intend to benchmark their pay rates against the market in 2022 than in previous years (87% of respondents, compared with 45% in last year’s survey). Only 1 in 10 respondents anticipate that their current recruitment issues will be resolved in the short term and only 1 in 5 foresee a short-term resolution to retention difficulties.

Looking at the influence of inflation on pay setting, 70% of respondents rank cost of living/inflation as an important or very important factor in their pay planning process. This is reflected in increased usage of official inflation measures: 69% of employers say they make reference to a formal inflation index (CPI, CPIH or RPI) in 2021, compared with 52% a year ago. The survey asked respondents how they expect inflation to influence next year’s pay awards. Just 16% anticipate that their pay award will fall below the level of the CPI/CPIH, while 27% will be above CPI but below RPI and 30% will be at or above RPI. So 84% will be at or above inflation, however it is measured

Based on the latest forecasts for inflation, this could result in a main range for pay increases of between 3% and 6%. ‘If this materialises, this will represent a departure from recent pay-setting behaviour, when outcomes were mostly in a lower and narrower range of 2% to 3%,’ said Zoe Woolacott, who oversees IDR’s pay monitoring activity. ‘Pay interventions to deal with workforce issues have tended to be targeted at particular occupational areas, but if inflation rises as predicted, and labour market issues remain as they are or even worsen, this could change.’

Coronavirus set to have a lasting impact on reward strategy
Around half of employers (49%) cite the impact of coronavirus on business as important or very important when determining pay increases. ‘The changes that this has wrought to management-worker relations could be with us for some time,’ says Ken Mulkearn, Director of Research at IDR. ‘The element of risk it has injected into previously safe roles means that motivation and morale is more explicit an issue in reward strategy than ever before.’

*Survey carried out by Incomes Data Research (IDR).