News

Demand for Innovative Pay Models Intensifies

It seems like we are all buying time. Eurozone leaders are deferring the inevitable with the creation of a new rescue fund, the Greek Prime Minister is planning a referendum to play for extra time with the electorate and businesses are looking to buy extended goodwill from employees during a period of falling real incomes.

Most recent findings from Incomes Data Services signal median private sector pay awards at the end of September falling to 2.6% and public sector awards stagnating at zero. The latter is of course the product of the Coalition Government’s pay freeze - applied universally, but for modest flat-rate adjustments to the base pay of lower paid public sector workers. Meantime, the National Minimum Wage has just risen by 2.5%, pushing up pay rates in sectors such as hospitality, contract cleaning and retail rather more than many of these sectors’ employers would prefer.

Whether pay awards trend modestly upwards or downwards over the next few months, the inescapable fact remains that employees will becoming increasingly aware of their falling real incomes – a product of working in an economy where price inflation is rising consistently faster than net earnings. The absence of irresistible pressure from trades unions will ensure that business economics alone force continuing restraint in pay progression budgets. However, the pressure to respond to employees’ plaintiff cries are not going unheard by HR practitioners, many of whom are looking to innovate their way out of the corner that existing pay systems and economic fortune has painted them into.

Our experience is that public and third sector organisations are increasingly focused on extracting themselves from incremental spine point progression systems, while private sector employers are struggling to apply any meaningful differentiation to pay awards on the basis of individual performance. These points of dissatisfaction are inviting renewed questioning of existing pay structures and the prospect of restructuring pay during a time when employees are more concerned about job security than earnings progression is enticing. How many employers can achieve this without the liquidity of generous pay budgets is an open question, but the new found preparedness to review pay structures is a welcome one and necessity is, as always, the mother if invention.

To read more on pay pressures affecting UK employers, see Mark Childs CIPD Blog.

The Long View on Long-Term Incentives

Many of us who have worked in financial services understand that the mindset of the retail investor is often little different to the employer’s when it comes to long-term investment. Private investors have a disturbing tendency to sell in regret at the bottom of the market and to buy in greed at the top of the market. Much the same seems to be true for the behaviour of employers and employees in relation to long-term incentive plans.

At this point in the cycle there is plenty of evidence that employers and senior employees alike are attaching too little value to their long-term incentive opportunities. This is understandable when the typical long-term pay-out levels for Directors of FTSE250 firms are now lower than the maximum annual bonus potential. Added to this finding, is the knowledge that one in four of these companies are currently making no pay outs whatsoever from their long-term incentive plans.

Meantime, HMRC statistics tell us that the number and value of awards in approved schemes is down by as much as two-thirds since 2000. Some of that change can be explained by the substitution of Sharesave with the Share Incentive Plan and the decline in popularity of Company Share Option Plans but the declining use of Enterprise Management Incentives and the sheer scale of decline in usage in Approved Share Schemes in recent years remains perplexing.

Alongside these trends in listed companies is the sharply contrasting practice of privately owned firms, private equity backed enterprises and family businesses. where new forms of long-term incentive plan are increasingly widespread. Schemes based on jointly owned equity or similar contracts for difference (CFD) have proliferated in recent years, largely unnoticed by HR professionals in listed companies.

The implications of these below the radar developments in companies outside the main FTSE350 listing and the neglect or over-regulation of long-term incentive plans in the listed sector is obvious. It serves to widen the potential earnings gap and thus attraction, for those working in smaller high growth firms compared to long established and less entrepreneurial listed companies. Such people will be hard to dislodge from the current employers and all the more so when much of that long-term gain is accumulating in a capital gains tax environment rather than the income tax regime applied to most listed company schemes.

To learn more about innovative approaches to pre-IPO incentives, hear what Mark Childs has to say at the next e-reward conference.

How Secure Are Your Reward Colleagues Feeling?

As the economic recovery falters and the seasonally adjusted unemployment rate ticks up to 8.1% - a level not seen since January 1996 – the prospect of HR redundancies returns to the horizon line.

The ever growing number of “necessity interims” in the HR community, those marking time between permanent assignments, is self-evident. Recent reductions in the public sector add to the present gloom of the HR recruitment market. Worse still, this trend seems to be intensifying as the Civil Service declares its intention to reduce the overall HR to Employee Ratio from a generous 1:50 to a dramatic 1:100 and all by 2013, as part of the coalition’s aim to reduce the overall Civil Service budget by 25% by 2015.This lead has been embraced by Local Authorities, who are rushing headlong into combined Authorities shared service centres as their central government grants have been slashed and their ability to raise revenue through Local Council taxation has been frozen.

Rising above the general downbeat picture of the HR recruitment market our survey of advertised vacancies confirms our belief that the demand for Reward specialists is undiminished, accounting for 34% of specialist HR roles, far exceeding opportunities available to the other mainstream specialisms of talent, resourcing, employee relations, OD, HRIS or learning and development.

Approximately 70% of advertised roles are for permanent roles and 30% for Interim or Temporary positions. Whilst salaries would appear to be holding up for permanent roles there has been pressure on interim daily rates, with reward interims reporting, almost universally, that they are being squeezed on day rate. This pressure is causing even highly experienced reward interims to perceive wrongly that they are operating in a labour market which is supply side rich and are opting for the seemingly safe haven of fixed-term employment or long-term low day rate contracts. In the final analysis, perceptions matter. It follows that as long as reward practitioners perceive insecurity in the external labour market, they will sit tight and interims will trade down. However, when appreciation of the facts overcomes the current sense of insecurity, reward practitioners will find a long queue of potential employees waiting to sign them up.

*Source – Aggregate analysis of Changeboard, Monster.com, Total Jobs, Personnel Today and People Management advertised vacancies

ER/IR HRIS Rec/Talent OD & Change OD & Change Reward
Average Totals 10% 5% 22% 21% 8% 34%