Pay setting in 2023: how much should you award?

Influenced by the recent series of health and economic crises, Duncan Brown advises on the best way to achieve a balanced, tailored and participative approach to pay reviews

Credit: Robert Chlopas

Deals and disputes

In February, Britain’s largest supermarket, Tesco, agreed to increase its pay rates in stores by 7 per cent. On 1 March, the even larger Walmart raised its minimum wage rate for 340,000 workers in the US by $2 to $14 per hour, almost double the Federal minimum wage level. Coffee chain Pret announced on the same day that it would increase its pay rates by 3 per cent on 1 April.  

But Tesco’s increase was its third rise in 10 months, and Pret’s followed a 5 per cent award in December. Pret’s new starter rates are up by 19 per cent year on year. That’s not quite as high as the base salary or rise for Pret’s chief executive, Pano Christou, from £314,000 in 2021 to £400,000, as reported in their 2022 annual accounts, but impressive nonetheless.

Yet, just 18 months earlier, Pret was forced to reverse Christou’s decision to halve the value of its store mystery shopper bonus, on the basis that it was unaffordable, after employees threatened industrial action. And we have all been experiencing the huge rise in pay disputes and strike action by NHS, transport and many other groups of public sector workers in response to the 4 to 5 per cent increases they are being offered, with no sign of a similar reversal. As chancellor Jeremy Hunt reportedly put it to justify the refusal to engage in talks: “Any pay deals must be within existing departmental budgets and not fuel inflation further… current union demands are unaffordable.”

Crises and changes

The Covid-19 pandemic, immediately followed up by the double whammy of record labour shortages, combined with the almost equally remarkable and unpredicted Ukraine-invasion-driven doubling of price inflation last year (from 4.4 per cent 12 months ago to a marginally reduced 10.1 per cent in last month’s ONS stats), have well and truly blown away the somnolent, market-matching world of (low) pay setting in the UK’s 2010s. 

But what will replace it and how do you set your award this year? 

2023 award levels

February’s ONS data for regular base increases in the last three months of 2022 – 6.7 per cent overall, 4.2 per cent in the public sector – are probably more realistic 2023 award indicators. While the Bank of England said it was expecting inflation in the UK to “fall sharply” from the middle of this year in line with the prime minister’s commitment to halve the 11 per cent peak rate, the CBI business group is forecasting that it will still be at 6.7 per cent by the end of 2023. 

XpertHR’s analysis of January awards found an average increase across the economy of 6 per cent, which I suspect will come closest to becoming a ‘going rate’ this year. Striking ambulance workers rejected an improved offer of 5.5 per cent from the Welsh government, but nurses’ leaders in Scotland are recommending their members accept the Scottish government’s latest offer of a minimum 6.5 per cent. The Fire Brigades Union postponed their planned nationwide strike after local government employers made an improved offer of 7 per cent for the current financial year and 5 per cent more in July for 2023-24. 

Six things to do

However, rather than simply following any attempt to discern a ‘going rate’ of market increase, based on my recent experiences I would recommend that you consider the following six-point plan for pay setting and enlightenment in such a foggy climate:

  1. Select and use your external data wisely: look beyond pay 

Rather than paying thousands for market pay surveys that just measure the symptoms of the current problems, go directly to the underpinning labour market and employment statistics – from the ONS and other reputable sources. IES director Tony Wilson, for example, does a brilliant monthly summary and analysis.

  1. Look inside rather than outside – ‘to thine own self be true’ 

Look at your own employer’s strategy, growth plans and current and forecast financial position to help you think through the size of pay award you can afford. But also consider your employee turnover rates and plan out your workforce needs and sources for the next 12 months and beyond.

  1. Look downwards rather than upwards 

Many recent awards were rightly skewed towards the lower-paid workers who were suffering most from this inflationary squeeze, with additional awards last year at Virgin Money and NatWest, for example, applying to those already earning less than £30-£35,000. The original £1,500 flat rate award proposed for the NHS represented a higher percentage increase for their lowest-graded workers, and BT’s award made to those earning less than £50,000 was similarly structured.

  1. Look medium term, not just short term 

My IES colleague, Steve Bevan, makes a cogent case for multi-year deals, and the Health Foundation sees this as a potential solution to the nurses’ dispute. Recent examples include the Ministry of Justice and HMRC in the public sector, as well as private sector companies such as AWE. So the rail companies are surely on the right track, for once, to be exploring two-year deals with their trade unions. And good news too on job insecurity as well as low pay. The Living Wage Foundation announced last month that more than 50 UK employers covering 45,000 workers have signed up to their Living Hours scheme.

  1. Look beyond base pay 

Around one fifth of private sector employers have made emergency, one-off, additional cost of living payments to their employees in the past year, while retailers such as John Lewis and Sainsbury’s extended their free and discounted food offers for their employees over Christmas and into the new year.

Health and wellbeing benefits, especially in support of improved mental health and financial wellbeing, are now integral to the recruitment, retention and rewards offer in a majority of larger employees. As the CIPD says: “Good health and wellbeing can be a core enabler of employee engagement and organisational performance.”

  1. Recognise ‘it’s good to talk’

At last, in the pay disputes for its own millions of employees, the government agreed to meet this week with some of the other NHS staff groups, following discussions and suspension of their strike action by the RCN last week. The same offer of new talks has now been made to the teaching unions. Royal Mail and the CWU union also jointly announced this week that they would enter a new process of talks with the aim of ending their long-running dispute over pay and productivity, facilitated by Brendan Barber, former chair of Acas. As the inimitable Cockney star of movie Made in Dagenham Bob Hoskins put it, and as Brendan would agree, ‘natter matters’.

Managing the balance

The joint statement issued by the government and RCN on the eve of them entering into ‘intensive talks’ at the end of February stated: “Both sides are committed to finding a fair and reasonable settlement that recognises the vital role that nurses play in the NHS, the wider economic pressures facing the UK and the prime minister's priority to halve inflation.”

Employers and HR professionals would do well to adopt a similar balanced, tailored, thoughtful and participative approach to their pay reviews in 2023.

Duncan Brown is an independent reward adviser