Pay the Price

Government official rates of annualised inflation for October were 3.3% on a retail prices index (RPI) basis and 1.3% using a consumer price index (CPI) measure. Pay increases at either of these levels is unlikely to be tenable.

Research by KPMG at the end of September showed that the average rise in pay for a FTSE-100 chief executive was 8%, and 7% for the average executive. Our own 2004 FD Salary Review (December 2004, page 29) found that the basic pay of FTSE-100 FDs rose by 6.5% for the year and 6% for FTSE-250 FDs. In addition, remuneration specialists Watson Wyatt have found that when it comes to total remuneration: “Top managers have soared ahead of other employees, primarily because of great increases in the size of annual bonuses and long-term incentives.”

So, if you are offered an inflation-pegged pay increase at the end of the year, how attractive will it be? Not very. And this may be borne out by Watson’s findings that 40% of employees are “actively considering leaving their current employer within the next 12 months”.(1)

This is supported by the July National Management Salary Survey from the Chartered Management Institute and Remuneration Economics, which found that “managers are increasingly likely to resign because their salaries are not rising quickly enough”.

Against this background, the CBI is advocating a freeze on minimum wage rates, regarded as “mean” by the TUC. Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD), responded: “While it is true that any dramatic increase in the minimum wage risk is damaging business and the economy, the reality is that modest increases are unlikely to be the biggest motivator behind pay pressures. Sectors such as social care, retail and hospitality are traditionally seen as likely to find the minimum wage onerous, but with all experiencing difficulties recruiting and retaining staff, the minimum wage is unlikely to be the main upwards pressure on wages.”

This is precisely the problem: it’s a simple matter of supply and demand. The CBI, among others, is bemoaning the lack of skilled labour and the CIPD Human Resources Quarterly Trends and Indicators Survey found that “more than half (52%) of employers expect to have increased the total number of staff on their payroll by the end of autumn (2004), and that difficulties with recruitment are expected by 48% of employers over the autumn”.

So what are the likely outcomes if all this research is true? First, above-inflation settlements seem likely and necessary if staff are to be attracted and retained. If not, they will simply jump ship to improve their standard of living in the current tight labour market.

Second, if a “total reward” strategy is what is enabling above-inflation levels of remuneration to be given to senior company employees, then that looks like the way to go for more junior ones. This view is endorsed by Watson Wyatt’s head of total reward, Eddie Hodgart, who says: “Almost 80 per cent of employers say they intend to move to a broader approach to managing their reward programmes. In some cases, this involves taking all the financial rewards – base pay, bonuses and pensions – into consideration.

“Other employers are looking to include non-financial elements of reward.” These can include better career development and promotion prospects, a better working relationship with managers and more opportunity for creativity in the work.

Third, the biggest pool of skilled and unskilled labour lies beyond our borders, not within them. Economic migrants are now underpinning sectors including the fast food industry and construction. While a high street sandwich vendor might rue his level of staff turnover, he is also fully aware that the people buttering his rolls are not from the UK.

Finally, remuneration committees are becoming increasingly aware that they need to keep all stakeholders, directors, staff, suppliers, customers and shareholders satisfied. Paying massive sums to directors based upon performance while quibbling about minimum wage rates for blue-collar workers is unlikely to pass scrutiny.

This is what having a flexible labour force and labour mobility is all about. In good times, labour will go where it is treated best.
(1) Watson Wyatt’s Total Reward Survey 2004, 8 October 2004. CIVIL MATTERS

On 9 December, the government announced plans to modernise civil service pensions. In addition to raising the retirement age to 65, the proposals include basing civil servant pensions on a proportion of pay earned throughout their career rather than on that earned at the end of it.

This seems like the answer to the riddle: ‘When is a final salary pension scheme not a final salary pension scheme?’ The changes could affect five million workers at a time when 100,000 of them may lose their jobs under the Chancellor’s proposals.

For civil servants, total reward is nothing new, but tampering with it could well backfire on their paymasters.