As we approach the end of the year, organisations have started to think about their pay review budgets for next year. Most organisations, including many of our clients, have their pay reviews sometime in Q1/Q2 – around January or April. But with rising inflation, along with a surge in recruitment salaries, pay reviews could pose new questions for HR this year.

UK Inflation is at its Highest for Nearly a Decade

Inflation has risen to over 3%, which is the highest rate in almost 10 years. This is largely a result of the Eat Out to Help Out scheme, which artificially pushed down restaurant prices this time last year. Another factor is the shortage of supply chain employees and higher oil prices, which has led to a rise in shipping costs feeding through to food prices. Therefore, it remains to be seen whether this upward trend in inflation is temporary or likely to continue into next year.

UK forecasts from HM Treasury show an average inflation of 2.8% for 2021 followed by a downward trend over the next few years. Both CPI and RPI are projected to fall by 0.6% in 2023.

Figure taken from UK Pay Forecast Report 2021

What Does This Mean for Pay Increase Budgets in 2022?

In September, we ran a pay forecast survey to help organisations with their salary planning for 2022. Over 100 organisations participated. At the time of the survey, only 6% of organisations stated that they were planning a pay freeze in 2022, compared with 17% that had a pay freeze in 2021.

Excluding pay freezes, the median pay increase budget for 2022 was 2.5%. Some organisations are planning for a higher budget, with the upper quartile (75th percentile) showing a 3.5% increase and the 90th percentile showing a 5% increase. There were some differences by sector, with the highest pay increase budgets found in Life Sciences.

These numbers are not surprising in light of the news that some organisations – such as Black Rock, the world’s largest asset manager – are planning to increase the salaries of all employees at director level and below by 8%. Other well-known brands such as Costco, McDonald’s, Under Armour and Wayfair have all pledged to make significant increases to the salaries of their entry level employees.

The Great Resignation & Surge in Recruitment Salaries

Around the world, employees are re-evaluating their work and sense of purpose, and many are resigning from their jobs. Meanwhile, organisations are trying to figure out how to retain their people and at the same time, struggling to fill their vacancies.

The number of vacancies has increased by 30% from pre-pandemic levels. Coupled with a fall in labour supply due to the ‘Great Resignation’ and Brexit, starting salaries have surged at the fastest pace in over two decades. Retail and construction companies are struggling the most to fill gaps in their workforce after the pandemic prompted workers to seek more secure jobs.

Resignations are highest among mid-career employees aged 30-45. There are also significant differences in turnover between different industries, with the highest resignations seen in healthcare and tech. With demand outstripping supply, there are large differences between the salaries being advertised and the expectation of candidates. This has resulted in some companies offering exorbitant salaries to secure skill sets, particularly for business-critical roles.

How Will This Affect Salary Benchmarking in 2022?

Many of our clients have asked about their approach to benchmarking leading up to their 2022 pay reviews. Will the surge in recruitment salaries be reflected in the salary surveys used for benchmarking? The short answer is no.

While companies are offering significantly higher salaries for recruitment, most are not adjusting the salaries of their existing employees (the vast majority of their workforce, with employees doing the same or similar roles).

The real question is: do we really want to benchmark all our salaries based on the current surge?

While it’s important to recognise and understand the current challenges in recruitment, we don’t know if this surge in salaries is temporary or here to stay. Even if it is temporary, this is likely to create equal pay risks due to pay discrepancies between new and long-serving employees.

Our advice: while you plan your pay budget for 2022, consider implementing a separate ‘equal pay’ budget to manage equal pay risks throughout the next year.

Written by Rameez Kaleem, Reward Director at 3R Strategy

If you would like to discuss benchmarking strategies for your organisation, send us a message or call 0203 8806650 today.