Inflation Rates and the Pay Rise Conundrum

As businesses have stepped into 2023, one unwelcome follower has been the economic uncertainty and the ongoing pay increase conundrum driven by high inflation and the continued cost of living crisis that we face.

Inflation averaged 9.2% in 2022 up from 2.6% in 2021, and in October we saw inflation at a 41-year record high of 11.1% which looks to have been its peak. The speed at which inflation falls in 2023 will help us determine the duration of the cost-of-living crisis.

The Bank of England have acted with rising interest rates (sitting at 4.25% are currently the highest since pre-financial crisis in 2008) which increases borrowing costs, thus adding more pressure to employees’ pockets. Latest government forecasts appear ambitious that inflation will start slowing and fall to around 3% before the end of 2023.

The current rates and uncertainty continue to leave employers in a difficult place of trying to balance pay increases with affordability, without stoking the inflation flames further.

Many of our FACT3 clients have been working closely with our Numbers and People teams to understand how they can bring their pay up in line with said rises. In 2022, we saw client increases range from the traditionally adopted market rates of 2-3 percent, up to an inflation-matching 10% in one organisation. The average we saw across our client base was 5% in 2022, which reflected the national average of private sector increases. However, this sits well below the average inflation for the year.

Our own approach, (along with several of our clients) has been to look at innovative alternatives that can address the inflation driven cost of living impact on employees, without ‘locking’ the company into high inflationary increases over two annual pay review periods.

A method we have seen adopted is a mix of a fixed inflationary increases coupled with a temporary monthly fixed cost of living top up payment set for a period of time and to be phased out as inflation reduces back to a set target level.

The fixed amount payable to all staff (regardless of level of salary), is a way of addressing the impact that all employees are feeling - a similar squeeze on the pay packet of rising costs at the supermarket, petrol pumps and home energy bills.

Similarly, a range of our FACT3 clients have rolled out total rewards packages that helps ease the burden of financial and mental stress that we face. Through the provision of private medical, cycle to work schemes, employee perk platforms (retail discounts) and employee assistance programmes, this allows your employees to turn to the third parties to assist when the external stressors are lying heavily on their shoulders.  

On Tuesday 4th April, we will dig further into the topic above with FACT3 Partners, Andrew, Laura, Jayne and Andrew to elaborate on the essential actions SMEs must take in 2023, in order to deal with the matter at hand.

Written by Andrew Jackson, Partner: Numbers.