The Real Living Wage is the only UK salary rate based on the cost of living. Over 14,000 UK businesses voluntarily signed up for the scheme when it was introduced—one being 3R Strategy.
This year, it was announced that the new Real Living Wage has increased by around 10% to £12 an hour across the UK, and £13.15 an hour in London. This reflects the high inflation rates and unprecedented cost of living, particularly for low-paid workers.
Over 460,000 people have received a significant pay rise thanks to this campaign. However, this is the second year where there’s been a big rise in the Real Living Wage—significantly higher than the overall budgets organisations have been setting for pay increases across the UK. Our Global Salary Planning Report found that this number has been averaging 5% over the last two years.
What Does This Mean?
Because of this difference, we’ve seen some organisations pulling out of the Real Living Wage scheme. Some big names you may have seen in the press recently include Capita and BrewDog. There’s a good chance this might be due to affordability, but on the surface, it’s likely this will lead to some bad PR for any company choosing to withdraw.
We will probably see these companies come under scrutiny to publish their pay gaps, profit numbers and other pay-related data. Many people will be looking out for situations where they have pulled out of the Real Living Wage scheme but are still reporting high profits with their leadership teams receiving big bonuses.
The Impact on HR Professionals
Wage Compression
Let’s imagine that your entry-level roles have a salary range of £18k to £25k.
Then, your next band up is £22k to £30k.
When the Real Living Wage increases considerably, it will mean you can no longer pay £18k to your junior roles because it falls below the threshold. This may then require you to increase the bottom end of your entry-level range to £22k, for example.
As the next band up also begins at £22k, it creates what we call ‘wage compression’—meaning that there’s not much difference in pay between two pay bands.
This happens because we’re seeing the rest of the organisation’s pay increasing by around 4% or 5% on average, but the entry-level roles, for the past two years, have been increasing by up to 10% to match the Real Living Wage.
Organisational Culture
Wage compression can have a similar impact on your organisational culture as withdrawing your company from the Real Living Wage scheme. Employees in band 2 may think “I’m not getting paid much more than people in band 1. Why am I not getting the same pay rise?” Realistically, that might not be an affordable option.
If this is the case, and companies are using it as a last resort, it might lead to higher turnover where employees in band two or three decide they can get a larger pay rise by moving companies.
Equal Pay Risks
You may also find yourself facing a challenge with equal pay. As we mentioned above, you could have two jobs that are quite different in responsibility, scope and accountability. But due to wage compression, there’s no significant difference in pay.
As a result, you could be faced with possible legal concerns if these discrepancies are not justifiable.
How to Manage These Challenges
1. Consider Maintaining the Salary Differential
Increasing the salaries of your employees within band 2 by assimilating a percentage of 10% will allow you to maintain the differential as the Real Living Wage rises and avoid the legal issues surrounding equal pay.
But obviously, this will incur a large cost and may not be affordable for many organisations.
2. Differentiate Your Benefits Offering
If you can’t afford the 10% increase in salary, you could think about using your benefits offering to differentiate between bands.
For instance, you could offer a bonus or other enhanced benefit for people within the band above your entry employees. You could also think about offering more training and development opportunities. This could include mentoring or coaching to help them progress in their roles and careers.
Not only does this allow them to focus on personal development, but it gives them a potential way of progressing up to the next pay band with increased responsibilities.
By being honest and transparent about affordability and demonstrating that you are doing everything you can, you will ultimately help improve retention and create a more positive workplace culture.
3. Regular Benchmarking & Equal Pay Audits
Firstly, these processes will help you keep track of what’s happening in the market. Even if you can’t match the increase in Real Living Wage, you want to make sure that you are keeping up with market rates in order to retain your employees.
Also, equal pay reviews ensure there are no legal risks or potential equal pay claims in your organisation.
4. Differentiated Budget for Junior Roles
Many of us are starting to think about annual pay reviews for 2024 and 2025. And, with so many of us being impacted by wage compression, it’s worth considering a differentiated budget for more junior roles in your organisation to take into account the rising costs.
Let’s say the Real Living Wage is £20,000—meaning you need this much per year to live on. Imagine you have one group of people that gets paid £20,000, and a second group that gets paid £50,000.
Instead of offering a 5% pay rise for all employees, organisations could consider, for example, a 7% increase for their more junior roles versus a 3% increase for more senior roles.
Conclusion
Our focus should be on ensuring we are treating and paying employees fairly. To attract and retain top talent, it may take more than this—but that’s where we can begin to think about the alternatives.
Introducing new benefits and differentiated packages is a positive change that many employees will appreciate. The key is communication. Without being open and honest about the decisions we make, we will never build a culture of trust that encourages people to remain part of our organisation.