Pay bargaining in recession
It came as a bit of a surprise to many when RPI inflation dropped to 0.1 per cent for January 2009, when it was announced on 17 February. How times have changed since inflation appeared such a threat to pay bargainers back in August 2008. Then the outlook was for inflation at 4 to 5 per cent for the next six months or more. Now we face negative inflation in the first quarter of 2009.
Those readers of the IDS Pay Report would have been forewarned of this reversal of fortunes, with the inflation forecasts published in the first January issue (1016), which are outlined below. This has inflation dropping back to a low point of -2.7 per cent in September 2009.
All this amounts to uncharted waters for pay bargainers. The January picture on pay shows wide differences across the sectors, with pay deferrals and freezes for some and increases of 4 and 5 per cent for others. The median pay rise for January is 3.5 per cent, but quite a few of these deals are second and third stages of long-term deals with inflation triggers from last autumn. If we exclude these increases then median rise from new deals 3.2 per cent, which suggests that not all companies are in the same recessionary circumstances.
Given an unprecedented context for pay bargaining, of recession and negative inflation, IDS intends to give readers as clear a route map as possible through 2009. This will involve an independent assessment of all the decisions on pay in every sector of the economy. More so than most years there will be a wide variety of outcomes and experiences, and we hope to reflect them all.
Click here to view the latest IDS inflation forecasts.
Employment law – busy times ahead
Fasten your seatbelts as it's going to be a busy year. Top of the list of employment law developments for 2009 is the impending abolition of the much-criticised statutory dispute resolution procedures. From 6 April, parties are encouraged to follow Acas's revised Code of Practice for handling disciplinary and grievance situations at work, which is based on broad principles of fairness rather than a prescriptive set of rules.
Another major development is the Equality Bill due to be introduced in Parliament in the Spring. The Bill's main task will be to consolidate existing equality legislation, but it is likely to include new developments such as outlawing pay secrecy clauses in employment contracts and positive action measures to allow employers to take under-representation of certain groups into account when selecting between two equally qualified candidates.
Enhancements of existing rights also feature in the legislative timetable. Most notable are an extension of the right to request flexible working to parents of children up to the age of 16 years old and increases in statutory minimum paid holiday entitlement from 24 to 28 days for those working a five-day week. Both are planned for April.
As if this wasn't enough, additional developments prompted by EU social policy measures may including legislation giving agency workers rights equal to those of comparable permanent staff after 12 weeks' engagement and changes to the 48-hour maximum working week opt out. Although discussions in Europe concerning the latter stalled last year, the European Council hopes to reach final agreement with the European Parliament later this year. This may result in the opt-out - so beloved in the UK - being removed or severely compromised.
Anyone hoping for a quiet year will be disappointed. But rest assured that IDS Brief will be there to track and comment upon all these developments.
Hard times ahead for boardroom incentives
When times are good and incentives are paying out it is easy for remuneration committees to argue that all they are doing is rewarding directors' high performance. But now they are faced with the other side of the coin. Times are bad and so if there is any truth in the 'pay for performance' culture that has gripped UK boardroom remuneration practice over the last decade then incentives schemes should stop paying out in line with deteriorating corporate profits and share prices.
This is how it should work in theory. But remuneration committees are going to be posed with a dilemma over the coming period - do they allow earnings to fall and risk demotivating directors or do they redesign incentive schemes so that they continue to pay out. This is the paradox of pay for performance. On the one hand, poor performance should result in falling earnings. On the other, to act as an incentive targets need to be achievable thereby allowing the possibility of paying out. Changed circumstances require new targets that are achievable.
Just imagine, however, what those outside the boardroom will make of this. There will appear to be no downside to pay for performance. Incentive pay for high performance. Incentive pay for poor performance. This straightforwardly risks inflicting that 'reputational damage on the business' warned about by institutional investors.
But where companies have opted for maintaining incentives, we have already seen shareholder discontent. In February, the shareholders of Bellway Homes voted against the remuneration committee report in protest at the awarding of annual bonuses when performance targets were not met. This was only the second time since corporate governance regulations came into force that a report has been voted down and unless remuneration committees get the balance right this will only be the tip of the iceberg.
Over the coming year the IDS Executive Compensation Review team intend to monitor the changing shape of boardroom pay. Looking at how companies are modifying their boardroom remuneration practice in reaction to the economic downturn. Some of the key questions we will be focusing on are:
- Will directors take the lead by accepting pay freezes?
- Will incentive scheme be redesigned with targets being adjusted in the light of current circumstances?
- Will Government involvement in major banks have a wider impact on boardroom remuneration practice?
Will shareholders adopt a more questioning attitude?