Employers must tackle low wages, gender pay and reward options to boost UK productivity, says IES

Government and businesses ‘should drop counter-productive pay restraint measures’

Employers must focus on three key areas if they hope to address the problematic economic environment of low pay, widespread skills shortages and intense cost pressures, warned a new report by the Institute for Employment Studies (IES). 

The study, Fairness, flexibility and affordability, paints a complex picture of the British pay landscape. 

The record number of people in employment combined with widespread skills shortages, exacerbated by the pressures of Britain’s exit from the EU, has to be balanced against intense cost pressures on both the private and public sector. The latter has operated under an economic austerity policy since 2008 – with pay rises capped at 1 per cent.

As the British economic landscape changes rapidly – with the evolution of the gig economy and a steep rise in self-employment – employers and the government must act now to address low pay and productivity in the workplace. They must introduce measures to engage employees to achieve high performance, said Dr Duncan Brown, IES head of HR consultancy and the report’s author. 

“The UK’s productivity woes, lagging behind countries like France and Germany, are partly down to a lack of investment in skills – and too many businesses benefiting opportunistically from a prevailing culture of low pay,” Brown said. 

The IES findings propose that prioritising and balancing the goals of fairness, flexibility and affordability in reward arrangements are essential to tackle the challenges facing the UK economy.

The IES report argues that a more urgent focus on addressing low pay and improving skills-based pay progression will be vital across sectors in coming years. It urged employers and the government to drop “counter productive” measures of pay restraint, saying: “There is increasing evidence [...] that economic austerity is failing.” 

The onset of gender pay reporting, which requires all UK-based employers with 250 or more employees to calculate and publicly report on the gaps in pay between their female and male employees by 5 April 2018, has also been shown to have a positive impact on employer awareness of gender pay gaps and plans to address them.

“Our research analysis shows that many individual actions by employers and governments have the potential to impact positively on gender pay gaps, and these are the areas that we focus on when advising individual employers on how to address their gender relativities,” Brown said. 

“However, unregulated and flexible performance and market-based pay and bonus systems do appear to have reinforced gaps and produced unexplained gender differences, particularly in bonus scheme payments.

“The new reporting requirements are forcing many private sector employers to review the consistency and fairness of their pay determination methods.”

The IES identified further action to be taken by employers and the government. This included employer transparency and national pay relativities, female representation on boards, and flexible working and parental support. 

Improving broader employee engagement is another key measure, with Brown calling on employers to take steps to practically implement systems that will boost engagement and productivity. 

While engagement surveys are now widespread among UK organisations, studies suggest that few organisations act on the recommendations received. According to the report, employers may use rewards terminology to disguise cost savings, pay restraint, benefits cuts – and reductions in their total reward co

“Thanks to cost regulations and restrictions, many organisations are moving towards vanilla or copycat rewards approaches: not as many companies are linking engagement to their organisational values, what they stand for as a business and what will engage their people in the right way,” Stuart Hyland, associate partner at Aon Hewitt, told People Management.

“Certain sectors that have traditionally been among the lower cash sectors but had much stronger benefits are now comparing themselves on their individual components, with an ever-increasing push to get further up the comparative table.

“The idea of a lower-quartile pay policy has all but disappeared today – 20 years ago this was not uncommon at all because organisations would supplement it with other benefit offerings that were much more in line with their business values. 

“With less differentiation, this is impacting on the low-pay environment, and certainly on this debate around reward, performance and values, and engagement, which is a daily challenge.” 

If the UK is going to adapt to meet new challenges in pay and reward, effective national and employer reward strategies must be the result of evolutionary change, and address multiple initiatives rather than ambitious ‘individual solutions’ to issues such as skills shortages such as the apprenticeship levy, the report concludes.

“[We must] tailor and evolve approaches that most effectively leverage these complex relationships in practice,” said Brown.