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2014 wages – hold static or be prepared to increase?

2014 wages – hold static or be prepared to increase? Conflicting pressures present a dilemma for small employers.

Previously in my career I have been responsible for negotiating annual pay rises on behalf of companies. Those negotiations would sometimes affect thousands of employees. My job was to be fair, ensure we remained a competitive employer, but of course to minimise the wage bill where we could. On the other side of the table the union negotiators were there to achieve the biggest rise they could secure on behalf of their members.

To manage expectations (and this is equally applicable to small businesses today) we would always look closely at external factors. What was inflation doing? What’s the company next door paying for similar staff? What’s the economic outlook? We’d look at internal factors too, like profitability, productivity and future plans for staff numbers. I’m going to focus in this article on the former, the external environment and its implications for wages this year, and next.

On Thursday 16th April we saw inflation fall again with CPI hitting a 2014 low of 1.6%. From a wages perspective lower inflation generally results in lower pay increases, since most large companies (and until recently the public sector) will define pay increases in the context of ‘Inflation’ or ‘Inflation+’. So the lower inflation is, the lower the increase workers expect, the easier it is for businesses to limit wage rises.

There’s another external argument too for limiting wage increases. To try to meet the shortfall in state pension funding, the government introduced pensions auto-enrolment, and for the last couple of years the largest companies have been enrolling. From now until 2018 the smaller employers (the bulk of the private sector) will also have to join and this will cost employers initially +1% of a qualifying employee’s salary, increasing in yearly increments to 3%. Like it or not, pensions auto enrolment will have a negative impact on employer wage bills and many employers will use this, as well as low inflation, to justify not increasing workers pay in 2014/15.

Low inflation then + higher pension bill = low or no wage increase.

Let’s have the counter argument, in favour of wage rises. As I’ve said countless times, good businesses are built on good people, without exception. And good people only tend to stay where they feel well rewarded and in wage sensitive industries, where they know they aren’t going to get very much better terms by accessing the job market. In a situation of high unemployment there is less competition for jobs, and employers don’t feel the need to compete as strongly on wages. But that was yesterday, not today. As inflation is falling, so is unemployment, with a 77,000 drop to 2.24m (unemployment peaked at almost 2.7 million at the end of 2011, its highest level for 17 years) and international recruiter Michael Page reporting a significant upturn in activity (particularly in executive roles) in the UK.

This resurgent confidence in the employment market is beginning to have a knock on effect lower down the employment market too – Britain is hiring, and as ever this is being felt more acutely in the economic hotspots across the UK – around our cities and suburbs. I’d like to return to an earlier argument – that pensions auto-enrolment increases costs for employers – because it has a relevance to the counter argument too. It’s not just employers who will bear the costs of auto-entrolement, because employees themselves have to contribute to their own pension pot, meaning that their net earnings will reduce, and if they feel poorer, they might be tempted in a hiring economy to go to another employer willing to pay more. To avoid that happening, the original employer might want to think about paying more.

So unemployment falling, with increasing competition in the labour market + the negative impact on earnings caused by pensions auto-enrolment = basic wages rise.

So we have conflicting external pressures, low inflation and increased pension charges which suggest lower wage increases, and a strengthening economy and increased competition in the labour market (and a real income reduction to pensions) which will apply opposite pressures.

In the final analysis businesses who have no trouble attracting and retaining staff will take no more than a passing interest in these conflicting pressures, but those who don’t would be wise to take stock and re-evaluate whether their reward packages are cutting the mustard.

Bill Larke was formerly responsible for UK employee relations for Coca-Cola Enterprises Ltd, a business employing 3,500 and where he was responsible for pay & retention strategy and negotiations.

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