Spiralling inflation sounds the alarm over wages – so what can employers do?

Record inflation is forcing employers to get creative with their employment packages.

As inflation soars, wages are lagging behind. Figures from the Office of National Statistics (ONS) tell the story. In August, average pay actually increased by 4.7% (excluding bonuses). But ‘real’ wages – after adjusting for inflation – fell by 3% between April to June.

According to the Economics Observatory, the UK’s minimum wage is falling behind inflation for the first time in twenty years.

Some analysts believe that increasing wages would create a vicious cycle and only exacerbate the issue, leading to a so-called wage-price spiral. Other, more hopeful, voices say this theory is based on out-of-date economics.

Nevertheless, many businesses can’t afford double-digit pay rises, which is leading them to take a holistic approach to pay and reward such as:

• Providing professional financial advice to improve financial education across the workforce.
• Offering higher pension contributions.
• Guaranteeing staff on casual/part-time contracts a minimum number of hours per month.
• Bonus/profit share.
• Investing in training and development.

We spoke to accountants and industry experts across the UK for their views and advice.

Focus on non-wage elements of pay and reward such as guaranteed minimum hours, employee benefits and upskilling opportunities

Damian Connolly, MD, Sakura Business

The main issues we’re seeing across businesses are around recruitment and salary expectations. We’re advising clients to consider whether their existing staff can fill some or all of a vacant role with a requisite wage increase.

We are also advising our clients to consider the following pay and reward approaches:

•  Implement training programmes. Are they able to train up their own entry-level staff to be able to fill more senior or valuable roles in 12/18 months’ time?
•  Consider guaranteeing staff on casual/part-time contracts a minimum number of hours per month to provide peace of mind and stability.
•  Consider providing an employee benefits package including income protection, PMI or increased pension contributions.

These will have a financial cost, but will not push up wage levels for these roles across that board and provide additional ‘security’ to staff in these times.

Verdict: Focus on non-wage elements of pay and reward, such as guaranteed minimum hours, employee benefits and upskilling opportunities.

Pay for staff mobile phones, take advantage of Work From Home Allowance and consider making use of ‘trivial benefits’ to help staff financially

Phil Ellerby, Founder & CEO, Northern Accountants

Considering the rising concern surrounding employee welfare, there is naturally a suggestion that employers should take on some of the financial burden – with salary increases often the go-to solution. However, aside from the wider tax implications, it shouldn’t simply be ‘a given’ that employers will step in.

Organisations are facing similar challenges themselves as costs of labour, materials, services, and their own energy bills are also on the rise – and a sudden increase in wider overheads could put some in financial difficulty and, worst-case, lead to redundancy.

For a firm with 25 staff, for example, that’s an extra £25,000 per year they would need to find in addition to labour costs such as national insurance. Increasing everyone’s take-home pay to cover the rise in cost-of-living drives this benchmark up – and it’s very difficult to bring it down again.

There are various ways to financially support colleagues without simply upping their monthly/annual wages.

• Paying for employees’ mobile phones. Get a contract in the company name and allow team members to use them personally, as this is exempt from any benefit-in-kind taxes.
• Take advantage of the ‘Work From Home Allowance’. The current rate is £26/month which can be paid without seeing supporting documentation and is also exempt from any benefit-in-kind taxes.
• ‘Trivial benefits’ can be given to employees without being a benefit in kind, subject to certain criteria (costs £50 or less, isn’t cash or cash voucher, isn’t a reward for work or performance).

Verdict: Pay for staff mobile phones, take advantage of Work From Home Allowance and consider making use of ‘trivial benefits’ to help staff financially.

Provide financial advice for employees to improve financial literacy across the workforce

Tommy McNally, tax expert and CEO, Tommys Tax

There are a number of options companies may want to consider instead of pay rises, but in my experience, I think it’s crucial for employers to focus on providing their workforce to adequate professional advice. Our research reveals that almost half of PAYE workers don’t even know that they’re eligible for a tax refund, with over a third of Brits stating that tax is the one topic in life they understand least.

Many people don’t have the means or capital to hire an expert for financial purposes, so by providing employees with the right advice ensures they’re getting back as much as possible during such uncertain times.

Accountants should ensure clients are aware of the rebates they and their staff are eligible for –  there are a string of tax-refund deadlines just around the corner.

Verdict: Provide financial advice for employees to improve financial literacy across the workforce. 

Low and no-cost benefits can have a significant impact

H-J Dobbie, Head of HR Consultancy, Azets

Businesses should avoid overpaying people as an automatic knee-jerk reaction. Keep wages fair and in line with market rates and conduct a salary & reward benchmarking exercise to make sure you are getting this right.

Low or no-cost benefits and initiatives can have a significant impact. It’s also wise to invest in training and development of your existing people, who will gain new knowledge, skills, and experience, rather than have them move on and leave a gap to be backfilled.

I would advise making opportunities available for promotion within the business, which will help reduce attrition.

You could also consider alternatives to pay increases such as:

• Low or no-cost benefits and initiatives.
• Invest in the training and development of your workforce who will gain new knowledge, skills, and experience.
• Hybrid working. This can help reduce commuting costs.
• Higher pension contributions.
• Bonuses/profit share
• Rewards for going green. i.e. changing energy supplier in exchange for a reward.
• Wellbeing initiatives including signposting to employee assistance programmes (EAPs) for help and advice.

Verdict: Low and no-cost benefits can have a significant impact.

Annie Makoff is a freelance journalist and editor.