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The impact of the National Living Wage on balancing budgets

==Discover how employers are adapting to these changes and striving to retain top talent amidst budgetary pressures.

New research reveals the impact of the National Living Wage (NLW) on pay awards, as HR professionals highlight that their number one challenge in the year ahead will be balancing budgets.

Figures from the spring 2024 edition of the UK Reward Management Survey* suggest that the NLW contributes an additional one per cent to affected employers’ pay bills, with an overall median pay award for 2024 of 5%. Meanwhile, those unaffected by the NLW rise report a median pay award budget of 4%.

Sustained higher levels of pay

“While pay levels consistently tracked inflation at around 2 to 3% for over a decade, 2023 represented a step change. Our spring 2024 survey reveals employers are upholding higher pay awards. The majority of respondents, 34 per cent, are awarding up to 5% pay increases in 2024, compared to only 3% of employers offering this level in 2021,” comments Paydata’s Managing Director Tim Kellett.

The National Living Wage rose on 1 April 2024 from £10.42 to £11.44 an hour for employees aged 21 and over. Previously, you had to be 23 to qualify. Explaining the impact of this change, Tim comments: “The increase in the National Living Wage is impacting employers who have had to budget for an additional one per cent as a direct result of the increase, particularly for healthcare, housing associations, facilities management and residential care sectors where they have a high population of roles at this level of pay. Many are carrying out compression analysis to help maintain competitive pay levels.”

By analysing pay grades, employers can monitor the effect of the upward pressure on pay created by the NLW increase, ensuring that they are offering meaningful pay awards to employees that reflect the role and any responsibilities.

The importance of a total reward strategy

Tim highlights how designing a competitive reward package is crucial to meeting employee expectations, “Pay benchmarking, employee opinion surveys and benefits benchmarking remain top of HR agendas. An equitable, objective reward framework, that is evidence-based, helps to attract and retain the right talent. These can all help address the number one challenge for HR professionals in the year ahead: balancing budgets.”

The UK Reward Management Survey results highlight how 50% of employers are paying a premium to recruit, or are awarding out of cycle pay awards to retain top talent, particularly amongst those struggling to find the right people and skills. Tim suggests that it is important to identify what employees truly value from their reward package, explaining, “Employee feedback through opinion surveys is crucial – seeking continuous feedback can help organisations adapt quickly to meet employee needs and build agile cultures where people want to stay and join.”

Building performance cultures

Budgetary pressures faced by employees and employers alike means there has been an increased focus on productivity. 29% are adjusting their reward strategies to place a greater emphasis on enhancing performance and productivity, while 25% are considering this approach.

Tim comments: “Building a high-performance culture requires buy-in across the organisation. With a greater focus on affordability, many are introducing a more robust performance management framework and clearer objectives in order to maximise productivity.”

Cost of living support

There has been a decline in employers offering formal support for the cost of living crisis. In 2022, one-off lump sum payments were commonplace as employers sought to help employees navigate higher costs which pay awards alone couldn’t match.

While one third of employers reported paying a lump sum to support employees in 2022, of a median amount of £750, in 2024, only 2% have decided to pay a lump sum of a reduced median amount of £575.

 

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