Pay/corporate performance balance

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Pay is one of those subjects which is interesting in general, fascinating when you know the people involved, and when oneself is concerned, intensely personal and private.

Just to give the subject a bit of a backdrop, official data shows that through the 1980s, UK wages grew by 8.8 per cent per annum. This rapid pace of growth was a direct result of Britain undertaking wide-scale industrial restructuring, a diminishing of punitive taxation (meaning there was a point to higher pay demands), and a reduction in collective bargaining.

As the recession bit in the early Nineties, overall annual pay growth slowed to 2.4 per cent. Pay once again accelerated to 4.4 per cent per annum in the following decade, although we now realise that much of this was on the back of an unsustainable expansion of credit. Interestingly, this was the only decade in the last four in which public sector pay outpaced the private sector.

One of the most notable changes to the economy since the recession has been a real restraint in pay, and a willingness to be flexible in hours and conditions of work. The result was that unemployment did not rise to anything like the level seen in the early 1980s or 1990s recession. More recently pay has followed a more sustainable trend rate of 2.4 per cent, with public sector pay showing particular restraint in light of the substantial and ongoing government budget deficit.

What is now happening to pay? In a recent Policy Voice poll of IoD members we asked a series of questions around pay and compensation. IoD members have been a responsible bunch, with almost half of members reporting that pay in their firms has fallen, or risen by less than inflation. Overall there has been a strong link between pay and corporate performance. Looking forward, most IoD members intend to give pay rises to their staff in the next year, but increases in productivity and corporate performance are the critical factors in determining any increase.

Two-thirds of firms now pay a cash bonus, with only a fifth of companies handing out shares or share options. That said, just over half of respondents said they believed that rises to base pay had the biggest positive effect on their employees.

While pay and compensation matters, it is also important to note it is not the only thing that matters. Managers appreciate that their staff are almost as keen on job security as on pay itself. Given the severity of the recession, this is entirely understandable. As to IoD directors themselves, again pay matters, but it is one of a host of issues; the ability to set terms and conditions of work, along with opportunities for achievement and responsibility in the company and for staff all being strong motivating factors.

For most IoD members the debate about the minimum wage versus the living wage is an academic one, with 72 per cent of directors’ firms already paying above that level.

To sign up to Policy Voice, visit www.iod.com/policyvoice

Twitter: @jamesrsproule

About author

James Sproule

James Sproule

James Sproule has been Chief Economist and Director of Policy for the Institute of Directors since January 2014. Prior to joining the IoD James led Accenture’s UK Research and Global Capital Markets Research. He started his financial career as a merchant bank economist working with both Bankers Trust, Deutsche Bank and Dresdner Kleinwort, and eventually helped to found the boutique bank Augusta and Company.

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