How to conduct a salary review in a high Inflation era

With UK inflation rates now sitting at around 10%, we live in an extraordinary high-inflation era. Employers are now feeling the pressure to respond with large pay rises which far exceed historical norms. We are seeing the effects of this economic turmoil in the form of increased staff attrition, hiring difficulties and even strike action.

So, how are employers responding to this situation and managing salary reviews in this high-inflation era, and what can HR professionals learn from this?

Deploy bi-annual salary reviews to keep up with the pace of economic change.

One of the biggest changes to convention we are seeing in this high inflation era are bi-annual salary reviews, which have historically occurred on a once yearly basis. But in these economically volatile times many employers are conducting salary reviews twice a year to keep up with the pace of economic change. These tactics have been most evident in the retail and banking sectors.

Aldi, which this year forced its way into the supermarket big 4, have deployed an economically responsive bi-annual salary review strategy, giving their 26,000 store workers two pay rises during 2022. Sainsbury’s also raised pay twice in 2022 and this is reportedly the first-time in their history that they have done this! A Sainsbury’s spokesperson said they were doing this to ‘attract and retain staff in a tight labour market and to help staff through the cost-of-living crises. Lidl gave two increases during 2022 to its 23,500 staff, which represents a record 10-14.5% increase over the period.

Use a one-off cost-of-living (COL) payment as an alternative to a bi-annual pay-rise

TSB’s HR professionals opted for a slightly different approach. They appear to have stuck with the annual pay review but gave their 4,500 staff a one-off £1,000 (COL) payment. Of course, this strategy will hit your organisational cashflow, making it harder to sell to the board but this front-loaded payment will be especially beneficial to cash-flow sensitive lower paid workers. Accordingly, this one-off COL payment strategy was only made available to staff earning less than £35,000 a year.

Incorporate ‘levelling up’ principles into salary reviews to boost morale

Some organisations are incorporating levelling up principles of financial equality into their high-inflation era salary review strategy. By focussing COL living payments to lower earners employers can reward the most economically vulnerable, narrowing the gap between high and low earners which can be good for morale.

After negotiations with its union Unite, HSBC recently offered about 18,000 of its call-centre and back-office staff, (lowest two pay grades), a £2,000 COL pay rise. HSBC is also proposing to raise its minimum salary in Britain to £22,750 as another way to incorporate levelling up into its salary review strategy.

NatWest struck a similar pay deal with Unite aimed at staff on lower pay bands which also included a one-off £1,000 COL payment for January. Other leading retail banks are striking similar levelling up pay deals.

Make use of external pay review bodies with relevant economic data

With around a third of the UK workers being employed by the public, education, and health sector we should see how the government is managing salaries in this high-inflation era.

Roughly half of public sector workers are covered by pay review bodies composed of experts including economists, sector specialists, HR professionals and former trade unionists.

This seems a sensible approach in normal times. However, critics have questioned the suitability of this annual review body approach which has today’s government reportedly working off out-of-date economic data from Q1 2022.

However, external review bodies and reward agencies do give organisations an opportunity to see the wood from the trees, and if they are using up to date information, then it remains a prudent approach.

Peg your minimum salary to the real living wage

Launched back in 2011, the voluntary Real Living Wage is set by the Living Wage Foundation charitable body, and is higher than the government’s national minimum wage and based on the real cost of living. It’s now paid by over 11,000 UK employers including half of the FTSE 500 with membership having doubled over the past two years, no doubt driven by corporate levelling up agendas and the COL crisis.

The foundation recently introduced a 10.1% rise in September, (brought forward from November), the biggest in the scheme’s history and meant to reflect soaring inflation costs. By pegging their minimum salary to the Real Living Wage, HR professionals can rely on a trusted external body to ensure their pay strategy is automatically attuned to the high-inflation environment.

Adopt a more financially redistributive salary review strategy

As much as your middle and high earning employees may feel that they are struggling with the COL, few of them will be in greater economic hardship than lower earners.

This does not mean that higher earning employees should be ignored. A below inflation pay rise does represent a real terms cut in salary and research shows that higher earners are more ready, willing, and able to move for a higher salary than lower earners.

However, research is showing that higher earners are receiving higher increases than low earners, which may be hard to justify to the lowest paid workers in your business who are being disproportionately affected by this high-inflation era. Such an approach could lead to resentment, increased disengagement, and turnover amongst low earners.

Perhaps there is a need for a more financially redistributive salary review strategy weighted in favour of lower earners, given the high inflation environment?

It is a gentle balancing act. If you focus on low earners and take your eye off the ball higher up you may risk losing corporate intellectual capital. Too much emphasis on protecting management may lead to feelings of disenfranchisement down the ranks that could lead to reduced productivity and increased attrition.

In a high-inflation era, it’s about finding the sweet-spot between the two.