Last reviewed 30 June 2016

These days it can feel like pay rises are as rare as hens’ teeth in our companies. Austerity has brought with it pay freezes for the public sector — with a maximum pay rise of just 1% for this year. Many companies have followed suit, either out of necessity in this period of belt-tightening, or simply taking advantage of this time when our expectations about pay are generally low. But where we do have pay rises, is it fair to offer this to some employees and not all? Is fairness even a factor in the world of business? “Gudrun Limbrick poses the questions.”

One thing is for sure, painful decisions and negotiations about salaries are very likely to be a feature of the private sector for months to come. According to a survey (of 1000 employers) by the Chartered Institute of Personnel and Development, employers are planning to increase the basic pay they offer to staff by just 1.2% in 2016. This would be the lowest average wage rise for two years. Forecasts made by employers last year suggested this year’s wage rises would be around 2% but these have now been downgraded. Several factors have been put forward as reasons for this downgrade (all of which are putting upward pressure on the costs of employment) such as greater pension costs, a rise in the minimum wage and a new government levy to fund apprenticeships, coupled with extremely low inflation.

Employees generally seem to have a strong sense of fairness. While there are other pressures on employers when deciding who gets paid what, the main driving factor in employee views on who should be paid what amount and who should receive a pay rise is based squarely on what is fair. People receiving different financial rewards when working as hard as each other is generally dismissed as unfair. While this is an intangible concept that it is hard to quantify, it is a very strong emotion to counter.

Feelings of being treated unfairly can of course lead to far bigger, and far more tangible problems. Staff morale and staff relations can plummet along with general satisfaction levels which may ultimately impact on productivity. Staff dissatisfaction can also impact negatively on staff retention which can increase recruitment costs. These dissatisfaction levels can be exacerbated by unequal pay rises which then further widen the pay gaps which already exist between different tiers, branches, departments and so forth. For these reasons, employers need to give careful thought to giving unequal pay rises to its staff team as the potential costs can be high.

While the focus is on fairness from the employee perspective, this is rarely a primary consideration from the perspective of employers. Employers have a need to use their salary budget as wisely as they can in terms of getting the most out of the least amount of spend. This means using salary increases only to encourage talented people into their employment. Where jobs are more easily filled, there is generally little incentive to give unduly high pay rises.

Employers will also want to reserve pay increases for those people in key positions who have done a good job for the company and who need to be incentivised to continue doing a good job for the company. It is for these reasons that higher pay rises (as well as higher pay) are often seen to be given to the more senior positions in a company rather than those lower down the pay and responsibility scale. Exacerbating this, employers may well already feel that a significant proportion of their employees have received a pay rise in the form of the National Living Wage which, from April of this year, gave an extra 50p over and above the minimum wage to employees aged 25 or over. In October of this year, the minimum wage will itself be increased by 20p.

However, there are arguments that, particularly at times of austerity, employers should encourage managers and other higher paid employees to lead by example. Why expect lower paid workers to put up with sacrifices to help the financial health of the company when those higher up the company hierarchy are not? Leading by example is a compelling argument for sharing the bad times with equality in terms of small pay rises.

This particular issue was arguably the most contentious element of the controversial pay rise that MPs gave themselves earlier this year of 1.3%, exceeding the 1% cap they have placed on all public sector employees. Anger might not have been so bad had this pay rise not come hot on the heels of the rise they awarded themselves last year of 10%. At a time where everyone is expected to tighten his or her belts, it is hard to come to terms with those already in positions of power breaking his or her own rules. While MPs claim that their pay rises are justified in terms of bringing their salaries into line with others, the action had no doubt caused significant damage to public confidence. Companies are facing similar controversial problems on a regular basis.

The oil company BP has recently found itself in a similar fix. The Chief Executive Bob Dudley was awarded a 20% pay rise reportedly meaning that his remuneration package (including pension) amounted to £13 million. The pay rise was justified on the basis that the company had performed well albeit at a financially difficult time, a difficult time which meant that a 20% pay rise would not be seen by all the other employees. BP reported a financial loss worse than previous years. This has left the company in a difficult position of hoping that its shareholders will agree with these decisions.

In a company where there are no shareholders, there is no way for dissenters to argue against inequalities in pay rises. Disgruntled employees can, in theory, take industrial action but with union membership and power currently at a low ebb and many employees not enjoying full employment rights (such as those who have worked less than two years for the company and those on zero-hours or self-employed contracts), there may be little opportunity to demonstrate disapproval.

It is important for employees’ sense of satisfaction and worth to witness fairness in their working environment. In companies which have a particular goal of maintaining ethical working practices or employee power, a focus on fairness among employees may be shared with the employers. However, in the majority of companies, fairness is simply not the issue, and employees are powerless to insist upon it. In these instances, pay rises are decided purely on the basis of financial necessity (and it is certainly far cheaper to give one or two key individuals a large pay rise than to give everyone in the company a mediocre pay rise) while providing incentives for key individuals in a company. It is this very different perspective between employees and employers that the issue of pay rises will always be a contentious one.