The cost of living crisis in the UK has left almost a quarter of adults struggling to pay their monthly bills. The last time inflation rates were this high, Bucks Fizz won The Eurovision Song Contest for the UK. While the pressure is on the government to address the financial crisis, employers must also rethink their total rewards strategies — or risk losing their staff and their employees' good will.
To address the current cost of living crisis, employers need to:
- Ensure they have a transparent compensation strategy in place that incorporates both cost of living and cost of labour.
- Offer personalised, relevant benefits as part of a creative total rewards package.
- Prioritise employees’ financial well-being — both as part of their overall duty of care as an employer, and to encourage employee retention, motivation, and productivity.
Here’s how to bring it all together.
Rethinking Your Compensation Strategy
Nearly half of employers surveyed by Mercer in 2022 do not factor inflation into their compensation budget. This could reflect a general shift in the 1980s away from wage increases based on the cost of living. However, with inflation rates back at 80s levels, and a tight labour market, employers who do not begin to acknowledge their employees’ financial challenges may find it even harder to retain talent.
Of course, salary increases aren’t always easy for companies to achieve. However, it may be time to try and find the money, especially if you’re one of the 60% of British businesses battling to attract and retain your workforce. The priorities of today’s employees have shifted, but compensation and benefits are still top of the list.
That said, compensation increases aren’t easy, and Taro Fukuyama, CEO of the employee rewards and recognition platform Fond, warns businesses not to rush into action without careful thought. “As a general rule of thumb,” Fukuyama says, “companies should tread carefully when responding to inflation concerns. While it’s tempting to jump to a quick fix, there are many factors to consider before simply offering everyone a pay increase.”
Fukuyama also observes that “not all employees experience the same inflationary pressures. Frontline and lower-wage workers are much more impacted by inflation than highly compensated engineers who work remotely. These discrepancies make adjusting for inflation more nuanced than it seems.”
It may be tricky for employers to find a solution that seems fair to everyone. For instance, prioritising pay increases for lower-wage employees may well be the right thing to do. However, it may also make it harder for businesses to pay the high compensation rates expected by highly skilled specialists. A creative rethink of your total rewards strategy may help your business act fairly while remaining competitive.
What Is a Total Rewards Strategy?
As a quick refresher, a total rewards strategy is a way of thinking about compensation as a package of different employee benefits, perks, programs, incentives, rather than simply as a financial transaction. Total rewards encompass the elements of salary, variable pay, recognition programs, career development, learning, well-being, work schedules, and other types of rewards, that together comprise the overall employee experience. The goal of a total rewards program is to meet employees’ needs, leading to a fulfilling and engaging experience at work.
In terms of Maslow’s hierarchy of needs, financial compensation covers employees basic needs — as well as their esteem needs. However, there are other requirements that may be more effectively addressed by a more complete benefits package:
- Employees’ needs for self-actualisation may be met by training or development opportunities.
- Esteem needs may be met by an employee recognition scheme or a well-designed performance management program.
- Employees with families may feel that remote work allows them more time at home, thus feeding their need for belonging and connection.
The total rewards approach isn’t perfect.
The idea behind the total rewards model is sound. Total rewards packages allow employers to create a more appealing work environment and provide meaningful incentives: unlimited paid time off, for instance, or subsidised learning opportunities.
The total reward package is intended to be additive — meaning employers should be providing additional benefits above and beyond those that meet their employees’ basic needs.
However, reward management expert Dr. Duncan Brown cautions that the phrase “total rewards” can allow employers to “cloak employment cost-cutting.” Writing for the UK’s Institute of Employment Studies, Brown remarks that “rather than maximising an individual’s total rewards through our policies, COVID-19 has highlighted the importance of collective security, defined by the OED as being ‘free from danger or threat’. Security from catching Covid during the pandemic; and now security and protection from declining living standards.”
In other words, while once employees may have been attracted by the additional benefits included in a total rewards package, they are also now highly aware of the fact that those benefits must not act as a substitute for a living wage and a reliable income.
The total reward package is intended to be additive — meaning employers should be providing additional benefits above and beyond those that meet their employees’ basic needs. Unfortunately, the recent health crisis and the current cost of living crisis have both served to highlight that many employers are failing to provide for their employees’ well-being, health or security. For instance, a 2020 report on key workers (such as school teachers, social care workers, and shop workers) during the Covid-19 lockdowns, found alarmingly high levels of burnout, financial insecurity, and other serious health and wellbeing concerns.
This is not to suggest that the term “total rewards” is itself problematic, but rather that it should not be used to disguise a lack of fair compensation or appropriate measures to keep employees safe and healthy at work.
Are employers responsible for their employees’ finances?
At this point, some business leaders are questioning how much responsibility they really have for their employee’s financial status. After all, technically employers are only responsible for paying a salary above the legal minimum and ensuring their employees are enrolled in a pension scheme. Finding the budget to bump salaries up may feel prohibitive for businesses building back after the COVID-19 slump.
Unfortunately, while employers may not be legally responsible for their employees, financially or otherwise, no employer is in a position to ignore the financial woes of their workforce. Research by the CIPD reported that money worries can significantly affect an employee’s ability to do their job, as well as causing health issues, stress, and a significant drop in productivity. The same survey, conducted in 2020, found at least 30% of employees were suffering from financial strain. Employers cannot afford to look the other way.
In fact, many of today’s employers have recognised that they have a role to play in their employees’ financial wellbeing. Research by the Wharton School of Business found over 60% of employers feel “extremely responsible” for their employees’ financial wellness today – up from just 13% in 2013.
Investing in employees’ financial well-being isn’t just a question of ethics either. The same Wharton study found more than 80% of employers believe their employee financial wellness programmes and tools help to increase everything from productivity to retention to engagement. In other words, while you’re under no obligation to take the current cost of living crisis into account when it comes to your compensation strategy, it might be well worth your while from a business standpoint.
Compensating Cost of Labour vs. Cost of Living
One way to address the current financial crisis is to factor cost of living into the way in which base pay rates are calculated.
What is Cost of Living?
The Cost of Living is the sum required to maintain a certain standard of living in a given location. It factors in costs like consumables, health services, taxes, transportation, housing and utilities. This is the benchmark most commonly used by employers when calculating what to pay employees when they are on temporary assignment overseas, for instance as part of a global mobility program.
What is Cost of Labour?
The Cost of Labour reflects the cost to hire and retain an employee, as based on the supply and demand of labour across all industries in a given location. According to the Economic Research Institute, the majority of businesses today use the cost of labour as their primary factor when determining employee salaries.
However, with inflation shooting upwards, it may be time for a rethink. For instance, when U.S. inflation rates hit double-digits in the 1980s, many companies chose to offer employees two separate increases — a merit-related raise, and an inflation-related raise, administered on two different dates.
Bobbi Kloss, the Director of Human Capital Management Services at the Benefit Advisors Network, agrees that today's employers “should use a combination of both cost of labour and cost of living” when it comes to setting compensation strategy. Kloss has laid out a straightforward approach to compensation that will “ensure a company is thoughtfully and methodically paying employees competitively.” She advises that companies:
- “Create detailed job descriptions for every position, outlining not only the essential duties of the position, but the prerequisites for certifications, years of experience, and/or years of experience in lieu of certification. This is integral for matching the position to the appropriate salary.
- Develop a comprehensive base salary strategy for each position — this is necessary to disrupt any potential pay inequity
- Determine where to slot your organisation’s pay philosophy:
- 25th: below the industry median
- 50th: the industry median
- 75th: above the industry median
- Place newly hired employees into the salary range based upon years of practical work experience, degrees, etc., and move promoted employees accordingly without creating salary compression (no distinguishable difference in salary based upon demographic differences).
- Conduct an annual review of salaries to account for Cost of Living, (COLA), Inflation and/or any other necessary adjustments.”
In addition, Kloss advises employers to apply their “creativity” to help employees find their way out of the current crisis. “For example, with the cost of gasoline skyrocketing, do employees need to be in the office and do they need to be there every day? COVID certainly showed us how to get work done remotely in most positions.”
For a complete guide to optimising your total rewards policies, take a look at our free resource: HR's Guide to Setting a Compensation Strategy.
Communicating Your Total Rewards Strategy to Employees
When it comes to compensation initiatives, open communication is key to a happy, motivated workforce. Failing to communicate effectively about salary decisions can cause a great deal of negative feeling - especially during times when employees are feeling the pinch.
For instance:
- If employees don’t understand when and how pay increases are given, they may feel your compensation strategy is unfair or unrelated to merit
- Employees may be completely unaware of the benefits available to them
- Your team may simply not appreciate the costs involved in retaining staff, and may feel their salaries are disproportionately low
The two keys to communicating your total rewards strategy are therefore transparency and personalisation.
1. Transparency
Transparency is increasingly important to today’s workforce. Slack’s 2018 Future of Work Survey found that nearly 90% of workers hoped that their next workplace would be more transparent. For some companies, total salary transparency is the only way to go. For example, Buffer, a social media platform, shares its formula for salary calculation and publishes every single salary online.
However, even if you aren’t comfortable with that level of openness, being transparent about how salaries are calculated and why changes are being made (or not made) is key to making your compensation strategy a part of a positive employee experience. For instance:
- Include a list of the total rewards package on employee salary statements to make sure that each employee is aware of the additional benefits included in their compensation (such as paid time off, stock options, insurance, profit-sharing, and so on)
- Communicate how salaries are calculated, and use standardised criteria, such as job tiers, tenure, and a competency matrix, to make sure that employees see your decisions as fair
- Don’t stick your head in the sand. If employees are struggling financially, but you are unable to increase their salaries, then you need to acknowledge the issue and look for a solution. And people typically respond better to honesty than avoidance — they understand that businesses need to survive, too.
2. Personalisation
Employees expect their employers to recognise that they are individuals with unique needs. For instance, Guardian Life’s Sixth Annual Workplace Benefits Study revealed that 70% of employees would be more likely to remain with a company that offered them personalised total rewards, such as extended parental leave or caregiver leave or subsidised mental health care.
It’s important to note that personalised benefits only work if transparency and a clear compensation strategy are already in place. Otherwise, you may find pay inequity creeping in accidentally.
Total rewards strategies don’t have to be totally overwhelming.
There can be a tendency for HR professionals to pass the compensation strategy buck over to finance. But employee compensation is intimately linked to key HR metrics, such as employee engagement, retention and performance. Contemporary HR tools can help make compensation a strategic asset to your HR team.
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