Pay rises can make or break staff retention rates, but many employers do not know what the best way is to handle staff pay increases.

The labour market in 2023 remains persistently tight with many vacant jobs and few available workers to fill them. Employers are struggling with recruitment, and hard to fill vacancies and skill shortages remains the biggest problem.

On top of this, pay increases have risen by up to 5% in the private sector, the highest since 2012 however the pay awards offered are struggling to keep up with inflation. The cost-of-living squeeze coupled with recruitment issues has resulted in many businesses offering an increased pay award to keep existing staff and to attract new talent. According to research carried out by CIPD, more than half of employers confirmed that they expect to raise employees’ base or variable pay further in 2023.

Pay rises can make or break staff retention rates, but many employers do not know the best way to handle staff pay increases. The legal position in the UK is that there is no legal right to a pay rise unless this is stipulated in the contract of employment.

However, a common practice in most business is to carry out a yearly review of employee performance and contracts of employment against an assessment of the business to check what the business can afford. This is then followed up with a 1-1 meeting with the employee to decide if they have earned a pay rise.

If there is no mention of pay increases in the staff handbook or the contract of employment than it is likely that an employee will enquire about a pay rise at some point during their employment. If an employee does ask about a pay rise, then you should consider the following before deciding:

• Can the business afford a pay rise?
• How long has the employee worked for the company and has their performance reached a satisfactory level?
• How long has it been since their last pay rise?
• Has the employee increased their workload or stepped in to help colleagues who are absent?
• Do you risk losing the employee to a competitor who offers increased pay for the same role?

After the above has been considered, you should organise a meeting with the employee to discuss the topic of pay. An employee should present a case as to why they believe they deserve a pay rise and if you feel that it is a reasonable request, the next step is to decide how much of a pay increase they will receive, and when it will come into force. Once you have provided an offer you should let the employee consider the offer which may then lead to negotiations, or a simpler result is acceptance of the first offer.

There are situations when a pay rise is refused and if this is the case you should prepare for the fact that you may lose a valuable employee or see a decline in their performance and productivity. If the pay rise is refused, you should provide encouragement through constructive feedback about how they can improve their performance with the potential to get a pay rise in the future. Rewarding employees with a pay rise has been shown to improve productivity and retention rates and employees are left feeling reassured that their hard work isn’t going unnoticed.

Pay rises for taking on others’ work?

As employers are struggling to fill vacancies, employees may need to step in to support team members, sometimes taking on a lot more responsibility that falls under their remit. Some employees have the expectation that they should receive more pay for stepping into help, however this is not the case. You do not have to pay an employee more to do this as they are required to support one another and the business due to increasing demand, and a provision in the contract of employment usually allows for this.

Although employees are not necessarily entitled to more pay to help with increasing demands, most employers are offering incentives such as an extra day of annual leave on top of their current entitlement, additional pay such as time and a half for hours worked outside of their contracted hours, or an offer of finishing work early such as a half day on a Friday. If a business cannot offer a pay rise, offering incentives may be a better option; this again will leave an employee feeling appreciated for their hard work.

If you are planning to offer your employees a pay rise, it is important that you follow a management procedure to ensure everyone is being treated fairly. FPM have several documents accessible to members on the FPM Core compliance system such as Appraisal Policy and Procedures for Staff that can support you in this.