Businessman's Hand Giving Cheque Over Glass Desk

Our popular blogger Steve Herbert asks: Which economic factors should employers include in their 2024 pay review process?

With the end of the calendar year fast approaching, many employers are beginning their process of calculating pay and benefits awards in 2024.  

Pay reviews are often a complex and finely balanced calculation, allowing for past achievements against Key Performance Indicators (KPIs), business and personal objectives in the coming year, and (of course) the economic factors that are constraining both employers and employees alike.  

This last point is a particular challenge at the end of 2023, and in this article, I will highlight the current outlook for the economic side of the pay review calculation in 2024.  In my view there are five key economic factors that employers should include in their pay review thinking:

  • The candidate crisis

In recent years the UK has experienced a prolonged candidate crisis, with some employment sectors really struggling to recruit and retain quality employees.  This has resulted in upward pressures on pay awards.  

Yet the acute shortage of candidates may be starting to lessen as we approach the end of 2023.  The latest figures from The Office for National Statistics (ONS) indicate that the number of job vacancies in the national economy has now fallen for 15 consecutive months.  It follows that this particular pay pressure may now be easing, but with just under one million vacancies still unfilled, employers still need to be mindful of offering a competitive salary and benefits package.

  • National Living Wage

The setting of the National Living Wage (NLW) is pivotal to pay awards in many employment sectors, and the NLW also has a knock-on impact on those on higher incomes. 

We don’t yet know what the NLW will be in April 2024, but we do have a very clear indicator that another significant increase is on the way.  The Chancellor said in his Conservative Party Conference speech earlier this month;

“At the moment it is £10.42 an hour and we’re waiting for the Low Pay Commission to tell us next year’s recommendation.  But I confirm today, whatever that recommendation, we will increase the National Living Wage to at least £11.00 an hour next year.”

This equates to a 5.6% pay rise to be funded by employers for those workers subject to the NLW.  It is also worth noting that the Chancellor has suggested that the £11 an hour rate is the minimum that will be announced.  It follows that employers should perhaps allow for an even higher award.  Such an increase may also need to be applied further up the pay scales to ensure that pay differentials are maintained.

  • Energy and Fuel costs

A more positive development is that domestic energy costs have stabilised this year – albeit at almost twice the price point being experienced in 2021.  

That said, fuel for motoring purposes has recently been subject to a series of price increases – up by around 9% in less than three months.  

The outlook for both is unclear, not least because of the ongoing war in Ukraine and now the unknowns of a new conflict that could yet escalate in the oil-rich region of the Middle East.

  • Inflation outlook

Energy costs were of course a major component of the inflation spike experienced in 2023, and as they have stabilised this has had a positive impact on the national inflation numbers too.  

The latest ONS figures suggest that the headline rate of inflation (CPI) is now 6.7%, a long way below the peak of 11.1%, but still more than three times higher than the Bank of England’s (BoE) target rate of 2%.

Inflation is expected to fall further in the months ahead, although the National Institute for Economic and Social Research (NIESR) still project inflation to be almost twice the target rate at 3.9% at the end of next year.

It is also worth remembering that food inflation remains far higher than the headline rates – with the ONS suggesting that this is now 12.2%.  Those on lower salaries – and often with lower levels of discretionary spending power – are more exposed to food inflation, so employers should perhaps factor this into their overall pay review planning.

  • Housing costs

Last, but certainly not least, employers need to be aware that housing costs are escalating for many of their employees.

Mortgage rates have escalated very rapidly in line with the 14 increases to the BoE base rate over the last two years, from a 300-year historic low of 0.1% to the current rate of 5.25%.  Many employees are on fixed-rate mortgage deals and have yet to be exposed to the full extent of this increase.  

Yet the problems are not confined to those with mortgages.  Employees in the private rental sector are also suffering increases in their housing costs.  The BBC reported earlier this month that rents outside of London had increased by 10% this year, and those in London by 12%.  And with more than 20 candidates viewing every rental property, this pressure on rental costs looks likely to continue.

Summary & other factors

So, although the worst of the cost-of-living crisis may now be behind us, the reality is that employees are still facing some very significant cost pressures, and employers need to allow for this in their pay review process.  

Yet that process should also consider other employment issues – and not least the need to support all aspects of employee wellbeing (as I explored in this item for Employer News back in March 2023).  

Sadly the situation of the NHS has only worsened since that article, with waiting lists this month hitting a new record high of 7.75 million people in England alone.  

It follows that employers reviewing their pay and benefits structure in 2024 should also revisit the benefits offered to ensure that each and every employee has the support needed to seek private health treatments when needed.  

The reality is that an ill and/or absent employee is not going to be as productive as the employer would ideally need, and given the still tight labour market, employers need to keep each and every worker fit, healthy, supported, and at work.


About the Author

Steve Herbert is Wellbeing & Benefits Director at Partners&