Catherine Chubb considers the impact of changes to rewards as we emerge from recession.
During the recession, surveys showed that around half of UK workers experienced a cut in pay, working hours or a loss of benefits. The most common cost-cutting approach taken by employers during the downturn was a salary freeze. But what is the impact of the measures taken on pay during the recession on the employment relationship? How will these measures impact the HR agenda as we move out of recession?
Widespread pay freezes
Joint CIPD and Mercer research showed that more than half of organisations froze salaries in 2009. The widespread pay freezes in the private sector seen last year are now being mirrored in the public sector, where the number of pay freezes is increasing. However, the extent to which salary ‘freezes’ in the private sector over the duration of the recession were really absolute pay freezes has to be questioned.
The latest CIPD Quarterly Employee Outlook reports that over a third (35%) of staff state their organisation had frozen pay. But, Institute for Employment Studies’ (IES) research into employer responses to the recession and reward effectiveness have highlighted that in a significant minority of cases, pay freezes have been applied with what could be termed ‘a pinch of salt’. Incremental and developmental pay increases, ‘hot skill’ payments for professional staff, pay increases and bonuses for high performers, all seem to have continued to operate in 2009 despite no general pay award being applied, meaning that at least some staff received earnings increases.
However, the use of other cost-saving strategies, such as the removal of overtime, unpaid sabbaticals and cuts in bonuses, which we have seen many companies adopting during the recession, has reduced levels of total earnings for many employees. The longer it takes for demand to return within companies, the more concern there will be about companies’ abilities to retain staff whilst also maintaining wage restraint.
Fairness of pay restraint measures
A number of attitude surveys have suggested that the wage restraint applied during the recession has also caused declines in employee morale and engagement. The attitude of employees towards changes which directly hit their pockets can be largely determined by the management of the process and an employee’s judgement of the fairness of the changes. How an employee feels they have been treated rather than the outcome itself can be a powerful factor in affecting their acceptance of any changes made to their reward package. Recent surveys suggest that one of the biggest barriers to higher levels of employee engagement is that only around one-third of staff feel that their pay is managed fairly at present. The pay freezes applied over the past year or so are likely to have increased this perception of unfairness.
In anticipation of this perception, many commentators forecast a difficult employee relations climate in the coming months as unions and employees try to win back some of the concessions made to their pay packets in 2009. The Bank of England’s Quarterly Bulletin also suggests that the outlook for employment will partly depend on developments in the real take-home pay of employees. Staff who may have become more confident in the ability of their employer to bounce back after the recession may be less willing this year to accept further pay restraint. They may seek higher pay settlements, especially against the background of rising inflation, with the Retail Prices Index now standing at 4.4%.
Alongside inflation rises, as the private sector and labour markets recover, companies maintaining cautious and restrained pay policies may face new retention pressures. This may bring the importance of fairness in employee motivation higher up on the agenda in HR management as we move out of recession. General attitudes towards City incentives and stellar bonuses have been extremely hostile so reward directors and remuneration committees may be more inclined to address internal pay relativities and fairness. If we consider the pay relativities between executives and the average employee, very few companies make this internal pay ratio known but there is no doubt that the growth in bonuses and long-term incentives has been a key driver of growth in earnings differentials over the past 20 years or so.
A shared destiny
During the recession, growth in internal earnings differentials may have been kept stable within some companies through applied pay freezes right across the organisation. Towers Watson research showed that when salary freezes were applied to both staff and executives this reflected a "shared destiny" approach, which fostered engagement among employees as they felt their leaders were "with them" in dealing with the pressures of the downturn. This was perfectly illustrated by the boss of Marks & Spencer, who said last year: "I certainly won’t be taking a pay rise… there won’t be any bonus, I certainly won’t be getting anything over and above what my staff enjoy."
This concept of a ‘shared destiny’ encompasses the trend identified by IES research of the growing importance of character traits such as integrity, honesty and reliability in managers. During the recession these character traits were attracting attention and admiration, and whilst this had been present before the recession, the downturn simply accentuated this trend.
When savings don’t stretch far enough
If pay freezes are maintained this year, it will be important for leaders to demonstrate these qualities, as it is all too easy to lose the trust of employees when implementing cost-reduction strategies that directly impact the workforce and their standard of living. IES research shows that during the recession companies were implementing cost-saving measures such as pay freezes, reducing working weeks and terminating bonuses genuinely in order to address and satisfy the considerable cost pressures they were experiencing. However, as the recession deepened some companies found they were having to go back to employees, Oliver Twist-like, in order to find more savings. These actions carried the potential for changing the employment relationship as they could cause resentment among employees who have already experienced financial losses through reduction in overtime or frozen salaries.
It is within this context that some companies must now try to rebuild a motivating and engaging employment relationship to place them in a favourable position when demand returns. Whilst leaders may have realised the benefits of engaging with employees and fostering trust, recent experiences may have made them rethink employee engagement on a more mutual basis. In this time of recovery will fairness be applied by ensuring all share in the benefits of returning growth or equally, will all share the pain of continued restraint?