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High inflation, tight labour market and equal pay requirements: Turning challenges into opportunities

By Raymond Wammes and Eva Jesmiatka | November 22, 2022

Companies are under pressure from multiple angles; as high inflation and a tight labour market make it difficult to hire and retain staff, while there is also an increased focus on equal pay.
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Companies worldwide are under pressure from multiple angles, as soaring inflation and low unemployment are creating difficulties in hiring and retaining staff, while at the same time there is an increased focus on pay equity and pay clarity. This is especially true in Europe, where employees in practically all countries are experiencing negative growth in real wages, while the European Commission is debating the details for a new Fair Pay Directive that will impact all EU member states.

We addressed these challenges in our recent webinar, introduced by Mary Cloosterman-Hughes (Director of Rewards Data & Intelligence). This article summarises the webinar.

Key groups of staff are missing

Staff attraction and retention are currently among the biggest issues in most European organisations, leading many to reconsider their compensation programmes. There is a particular shortage of personnel with digital skills, and of professionals in general. What’s more, nearly half of companies are experiencing problems in filling sales staff and middle management positions.

Remuneration is a key issue. With average annual inflation forecast to reach 7.4% in many markets, employees are becoming increasingly concerned about how far their salaries will stretch.

Using money to plug the skills gap

To attract and retain staff, most organisations are hiring people for a figure high in the relevant salary range. Around one third of European organisations have already increased their annual salary budget for 2022 or are planning to do so, and a further third are considering this action.

As a result, the focal salary budget increase for 2022 has risen for those European companies that have increased their budget by a huge 40%, from the 3% originally budgeted to 5% of the payroll.

The dangers of matching price inflation with wage inflation

Raymond Wammes (Director of Work, Rewards & Careers) explained why raising wages throughout the workforce is unlikely to be an appropriate long-term solution. One key reason is that high inflation is likely to be temporary, whereas salaries cannot simply be decreased in line with lower inflation. Another is that companies simply can’t afford this type of increases. A significant group of companies is also focusing on employees at the lower levels in the organisation and are willing to do something extra for this group. Increasing the pay of lower-paid employees may, however, lead to pay compression throughout the organisation. Another area to consider is internal equity, as hiring people high in the salary range can disrupt the existing remuneration structure and may create internal equity issues and a sense of unfairness among current employees.

Taking tailored actions

Rather than adopting a blanket approach to salary increases, significant numbers of companies have made funds available on an ‘as needed’ basis to target specific groups of employees – for instance, by offering targeted base salary increases. Other techniques include providing retention or sign-on bonuses, or spot rewards. This tailored approach is particularly relevant to European companies, due partly to local differences (including in governmental support levels), as well as to the unique requirements of each organisation. The payroll budget is therefore being used as a laser, rather than a broad brush.

Focusing on other forms of compensation

As a response to the tight labour market (and not so much to inflationary pressures), organisations also recognise the need to put a greater emphasis on non-financial elements Common strategies include increasing perceived value by enhancing workplace flexibility, offering more training opportunities, and giving employees more choice in how they work. The bottom line is that companies need to identify which target groups require greater rewards, and optimise the employee experience both in monetary and non-monetary terms.

Fair pay at work

Eva Jesmiatka, Director of Work, Rewards & Careers and European Lead on Pay & Career Equity, amplified on these points by outlining how a focus on fairness can actually support recruitment and retention. As external pressures on employers to address diversity, equity, and inclusion (DE&I) continues to increase, at a time when employee expectations around fairness and transparency are increasing as well, fair pay and pay clarity play a crucial role in delivering a high-performance employee experience. We see that leading companies have made DE&I and Pay & Career Equity a top priority in their journey towards becoming a responsible employer. What’s more, pay equity is becoming an important issue for society as well as for regulators both in Europe and across the world: the EU Fair Pay Directive is likely to have wide-ranging implications in the EU region, while we also see an increased level of regulation in other geographies including North America, the Middle East and the Asia Pacific region.

Regulation demands action

Legislation that ensures greater transparency for employees about pay also places a requirement upon employers to take action to address any inequalities. Data analysis capabilities are an essential starting point. Organisations need to understand their current position and whether they have any inequalities in the workplace; they need to consider how to adjust any inequalities and define how they can maintain equality on an ongoing basis by creating an equitable pay structure; and they must define how to manage pay going forward. Education of managers will be key, not only to ensure pay decisions are made with pay equity top of mind but also to explain how pay-related decisions are made. Managers also need to communicate information about pay effectively to their staff to build confidence and trust.

Embracing the new transparency

The new pay equity requirements will take companies on a journey towards greater transparency that is also a path towards an enhanced employee experience. People will increasingly expect insights on how their own pay and that of their peers is determined, how their own remuneration compares to that of others, and what they can do to impact pay and other rewards. By publicising their efforts and ambition in relation to the fairness agenda, organisations can show they celebrate openness and honesty in the employer-employee relationship.

Clearly a great place to work

Early adopters of pay equity and transparency are successfully communicating their approach using warm, positive, and inclusive messaging underpinned by simple statistics. The principle of ‘less is more’ definitely applies to pay equity communication. We also see real merit in focusing on planned actions to further improve fairness and equality in the workplace, as this recognises that the organisation might not be yet where it wants to be but that there is a plan in place to get there. Organisations recognise that the pay and career equity agenda and achieving greater transparency is going to be a multi-year journey rather than an overnight change. However, the fact that transparency needs to be increased is something that pretty much all companies recognise.

For more information, please contact Raymond Wammes.

Authors

Director Rewards

Director, Work & Rewards and Europe Lead on Pay & Career Equity

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