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The Impacts of Inflation on Reward Management

Top edge of a white building against a clear blue sky

Even before I started my first real job, as a graduate trainee in the 1970s, my salary was increased. It was unexpected, but that’s the sort of thing that happened with inflation at 23% that year. Fortunately, that was the peak and a few years later it was down to 5%. We got through it and then had a remarkable period of very low inflation of around 2%. The recent sudden uplift in inflation may be a shock, but it will be relatively short-lived. So, don’t panic!

If you take a strategic approach to reward management, the underlying philosophy and principles should see you through this period. Your reward strategy is enduring with high or low inflation and market pay changes. It is simply the decisions you make within that strategy that will differ according to the environmental factors. I frame my thinking in terms of what I call ‘strategic pragmatism’. Have a clear sense of what is important to the organization and a sense of direction. But be pragmatic in the context within which you find yourself, at the moment with high inflation, to keep moving reward on to help support the organization.

Your reward strategy should be clear and well communicated and understood. You need to explain your approach, for example, what fairness means and what factors drive pay reviews, how total reward works in your organization and how you ensure that everyone understands all of the elements of their total reward package.

Reward strategy requires you to consider both the whole and the parts. It is the whole reward that needs to be competitive and help support the aims and culture of the organization. But each of the parts will do different things. For example, salary is particularly important in recruitment. But make sure that all the other elements of reward are also valued as they form part of the package on offer. This is particularly important for benefits. I have seen benefits communicated as little more than what seems like a footnote in offer letters. But they can carry significant value, particularly if they are tax-free, such as life assurance.

Part of a reward strategy, or philosophy, can be to try to maximize value for employees for a similar cost to the employer. This means that you should regularly monitor what opportunities are available. Finding better ways to deliver value to employees becomes even more important with high inflation. Voluntary salary sacrifice is an area to consider; it could translate, for example, into discounted supermarket vouchers or low emission cars. Offering some more choices is attractive, such as buying or selling up to, say, five days of holiday. Maybe you have been offering season ticket loans, but with more home working they may not be needed. So, could you repurpose interest-free loans to help spread the cost of setting up a better home office?

Doing everything you can to ensure people understand the total value of their package and finding the best ways to deliver that value is important for recruitment and for existing employees. We know that benefits are rarely fully understood and appropriately valued by employees. But whose fault is that? There is no point in spending money on benefits if you do not spend time engaging people in their value.

But getting back to salaries. These need to be set appropriately both against the local market and what you are paying existing people in a similar role. Your reward strategy should be clear on what factors will influence salary reviews and salary levels, such as market levels, the organization’s finances, contribution, etc.

Make sure to have a rational approach to acquiring and using market salary data.  Generally, well-run salary surveys are the best source but, by definition, are a snapshot in time of a sample of existing jobholders. You need to be cautious as survey data may not reflect a fast-moving employment market; look at the increase in monthly earnings data and pay settlements. You test the market all the time when you try to recruit, so do not try to slavishly follow what might be out-of-date data; balance it with the current experience.

It is also vital to take into account what you currently pay people in a similar role. Sometimes when the external market is moving fast you may be in danger of paying salaries above those of some of your existing people. Research shows us that employees’ perception of their pay being inequitable compared with their peers is a greater source of disengagement than their perception of their pay against the external market. When this happens, you are likely to encourage disengaged employees and additional turnover. This costs a lot: much better to try to keep salary levels aligned.

Regular salary is much more important to most people than uncertain bonuses. Where the organization is unable to increase its fixed costs by increasing salaries, if possible, consider a profit-sharing bonus.

You may be surprised to know that as a reward strategy expert I spend a lot of my time trying to influence people to downplay rewards. I don’t mean that reward is not important – it is – but it is only part of the reason to work for an organization. If the organization leads on pay, then that is what people will demand – the employer sets the agenda.

Therefore, in addition to explaining the total value of all elements of financial rewards, place them in the context of the employee value proposition. How engaging is the purpose of the organization, how well will people be trained and developed, how much flexibility and challenge is there? It is not just about the money; these issues are important. Organizations do not spend as much time thinking about their employee brand as their customer brand. So much information is now available to people about what it is like to work at an organization, so managing employee brand is vital.

In summary, get your enduring reward principles agreed upon and use them to frame all reward decisions, but be pragmatic. Strongly communicate the total value of packages to all employees and with greater emphasis at the recruiting stage.  Maximize the value of the total package by using different efficient programmes. Use pay movement, pay levels from surveys, and your experience in the market to inform pay decisions and do not create disengaged employees by unfair pay for new people. Finally, remember that even in times of high inflation pay is still only one reason to work for an organization so put pay in context and turn down the reward dial if you can.