The global economy is not in a great place right now. Products and materials are in short supply. And if it can be found, labour is in demand while energy prices are exorbitantly high despite being on a downward trend – for the moment. Then there's the matter of rising tax burdens and interest rates which seem to complete the perfect storm.
So, it is easy to understand why workers want not just a pay increase, but one that protects against inflation. Simply put, many are having difficulty providing their families with essentials such as food, fuel, and heating.
Pay awards
A director at law firm Walker Morris, Lucy Gordon, is aware of the current issues for both companies and employees.
‘Most employees’, she reports, ‘expect an annual pay increase at least in-line with inflation, which is currently running at its highest rate in 40 years. So, it's entirely understandable that employers can't afford to be offering 9 or 10% pay increases at the moment, particularly given that employers face national insurance contributions on top’.
She's seeing pay awards in the range of 4–5%. In reality, this means that employees are actually taking home less money as a result of inflationary pressures.
Charles Cotton, a reward and performance adviser for the Chartered Institute for Personnel and Development (CIPD), explains that wage issues worsen in ‘a tight labour market where employees can easily change jobs to earn more’. In his view, the problem is that ‘if a firm can't increase pay by enough, then there is the danger it will lose staff and find it hard to recruit new workers’.
Deciding on pay rates
It's entirely logical that pay increases must be based on performance, behaviour, workload, and commitment from employees. That said, unless otherwise specified in the employee's contract, employers are not obliged to provide a pay raise.
But as to how pay is set, this is determined on a firm-by-firm basis as there are no defined standards to follow.
Cotton notes that while minimum hourly wage rates are set by the Low Pay Commission, pay is often regulated in some sectors of the economy through discussions with unions, and in others by independent pay review bodies.
He states that in the private sector, salary increases tend to be decided ‘by HR teams taking into consideration affordability, employee performance, future business plans, inflation, and staff turnover’. Nonetheless, he advises employers to be as upfront as possible since ‘staff will be more likely to see the decisions as fair if they understand the reasons for what's being offered and why’.
Gordon observes something similar. She says that in smaller organisations, pay is often decided by a managing director while in larger businesses and public limited companies it is typically decided by remuneration committees. She explains that these ‘remuneration committees have the job of benchmarking pay both externally, in the market; and internally, between staff operating at the same levels’.
Gordon also notes that pay in certain sectors is negotiated between the employer and unions. ‘This,’ she says, ‘is why we are seeing a return to strike action when these negotiations are not successful… employees are facing a crippling cost of living crisis and the unions are trying to secure the best deals they can’.
A matter of productivity
Linking pay increases to production or something else that benefits all is one way to address the pay problem. Piecework or team and company performance, Gordon thinks both are sensible approaches. ‘However,’ she explains, ‘even when businesses are outperforming their previous results, it may still be difficult to give substantial pay rises, given that the economy is tight’.
Cotton agrees. For him, having a linkage of some sort is practical and explains that ‘if a firm is successful, and individuals and teams perform as expected, then there should be money to pay out to staff’. For him, this has the benefit of not permanently increasing the pay bill because the bonus isn't added to employee's pay.
Also, he thinks that giving employees shares in the company is also an option, ‘so that if the firm becomes more valuable, then the success is shared with staff’. Further, he talks of other non-financial incentives that may be valuable to employees, such as tying improved productivity to more paid time off, higher pension contributions, or other such benefits.
Gordon also considers that non-wage incentives such as salary sacrifice ‘can present real advantages for employers and employees’ by providing a tax and NI-efficient means helping with purchases of items such as bicycles and cars or making pension contributions. However, she says that it is not necessarily appropriate for all employees; employers must consider what would happen if an employee leaves before the repayment term ends. Moreover, salary sacrifice must not result in income that is below the national minimum wage.
Ultimately, she thinks that businesses need to think outside the box when it comes to what they can do for employees to ease their financial problems. She explains how ‘we're seeing some really novel ideas that tick other boxes as well, such as corporate discounts on energy-saving devices, electric cars and solar panels for home offices’.
Working overtime: a solution?
Is overtime a practical solution? It could be, but Gordon advises that both employers and employees must first review contracts. ‘Overtime’, she claims, ‘is usually offered by an employer, and depending on the contract, the employee might be compelled to work it or might be able to decline the offer’.
The law mandates that workers must be paid at least the national minimum wage for the hours they work or are considered to be working. Employers may choose to offer overtime if there is work available, but as Gordon points out, ‘for businesses experiencing problems following the pandemic and in light of the downturn, this might not always be an option’.
To minimise any issues with health and safety, employers must monitor and keep track of any extra hours worked to ensure compliance with the Working Time Regulations. These state that if an employee is over the age of 18, they cannot be required to work more than an average of 48 hours in a given week; for those who are younger than 18, there are other restrictions. Employees can opt-out of the regulations.
The health of employees is an issue that concerns Cotton. He states that ‘while working more hours can help in the short term, in the medium- and longer-term it can cause mental and physical health problems and result in a drop in productivity’.
Employees making threats
Even with the best of intentions, negotiations might fall through and employer offers could be turned down. So how should employers respond if workers then threaten work to rule or strike action?
Strikes and ‘work to rule’ situations can disrupt businesses and their supply chains, which in turn could lead to an employer breaking contracts with its clients. Worse, as Gordon says, ‘employee relations issues can also expose the business to negative publicity’.
Gordon therefore advises employers to exhaust all collective bargaining processes, where they exist, to prevent industrial action. Nevertheless, she says that ‘it may not be possible to avoid industrial action altogether and how such action should be handled depends on whether the action is lawful (authorised and endorsed by a union) or unlawful (where employees take matters into their own hands)’.
For industrial action to be lawful, it must have been launched in anticipation of or furtherance of a trade dispute and the union must have fulfilled with a number of legal requirements, including stringent balloting and notification requirements.
In essence, a union won't be held responsible for any losses suffered by an employer as a result of the industrial action if the regulations are followed. In contrast, any unilateral activity by employees that is neither official nor legal is likely to result in individual disciplinary action, which may eventually lead to immediate dismissal for unauthorised absence. Additionally, when an action is proven to be illegal, a court order may be obtained to stop an illegal strike.
Worryingly for employers, employee unrest can lead to a non-unionised workforce seeking unionisation. As a result, Gordon suggests that companies think about ‘placating staff by agreeing to an informal request for voluntary recognition which might give the employer more scope to determine the remit of the union’.
But unions aren't all bad. Union representatives will be well-versed in market pay rates and pay increases that have been offered by other employers and can inform their members of what is generally happening elsewhere. Also, union officials can discuss potential cost-cutting measures with an employer that can be presented to its members to make increases affordable. They can also condition employee expectations by explaining that businesses are suffering and that some have even failed where their cost base, including pay, was too high.
Clearly it is best to avoid conflict to begin with, which is why Cotton suggest employers ‘go to arbitration to resolve any pay disputes’.
Implications for private healthcare
The cost of private healthcare insurance in the UK is on the rise. According to the 2023 Global Medical Trends Survey, published in October 2022, the rate of increase in the UK is likely to stand at 8.8% in 2023, up from 6.8% in 2022.
While part of the problem is due to general inflationary pressures as a result of COVID and the war in Ukraine, above-inflation pay rises for employees in the UK are also to blame.
On the positive side, above-inflation pay rises help to attract and retain skilled and experienced healthcare professionals which can improve the quality of care provided by private healthcare providers.
Indeed, the Guardian covered this back in December 2022, albeit in a less than positive light. The capacity to see and treat patients quickly helps to develop the reputation of private healthcare providers which in turn attracts more patients to the sector. So, with well-publicised delays in the NHS the private sector should do well, even if it has to pay more for its workers.
Additionally, above-inflation pay rises helps improve the financial stability of private healthcare providers by reducing staff turnover and associated recruitment and training costs. This improves the efficiency and productivity of services and ultimately benefits patients and healthcare professionals.
However, there is also the potential for negative implications of above-inflation pay rises. The higher costs of staff salaries may need to be passed on to patients in the form of higher fees, which could limit the accessibility of private healthcare services for some people. Back in 2020 the Society of Insurance Broking noted how the financial impact of COVID caused some to cancel or not renew some insurances. While home, pet and health cover were less affected, some were still struggling to afford to maintain their insurance products as premiums rose. Fast forward to January 2023 and Insurance Edge sees private healthcare likely to grow despite the rising cost of premiums with greater levels of concern about the NHS's ability to serve.
Where private healthcare providers are unable to pass on the costs of above-inflation pay rises to patients, they may need to cut costs elsewhere in order to maintain profitability. This could lead to reduced investment in equipment and facilities, reduced staffing levels or reduced salaries for other employees, all of which could have a negative impact on the quality of care provided by private healthcare providers.
Overall, the impact of above-inflation pay rises on the UK's private healthcare sector will depend on a range of factors, including the size, structure and indebtedness of the healthcare provider, the financial climate, and the willingness of patients to pay higher fees.
Conclusion
The problem of pay is persistent, and it is made worse by the ease with which individuals can now compare salaries and look for employment online, as well as by the pressures of significantly higher inflation and constricted family budgets. Employers are, of course, in a similar situation. Yet, for the time being at least, it seems like the staff are in charge. Employers must exercise creativity in providing affordable but feasible alternatives if compensation expectations cannot be met.