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Why we need to talk about inflation and pay and what to say

After years of being kept mostly below the government’s long-term 2% target, inflation leapt in 2021 and is set to continue rising. A post-lockdown demand boom has bumped into a series of supply shortages to drive prices up everywhere. To make it worse energy prices are also rocketing and forcing supply chain costs up even more.

Some economists estimate it may peak as high as 7%. After such a long period of low or negligible price hikes, how are founders coping with the inevitable challenges that come with rapidly increasing prices?

It is a concern for many founders. Will customers allow prices to keep pace with rising costs? Will they, in short, be able to pass on any cost increase? Are you a price setter or a price taker? If you set prices for the market and demand is not too price sensitive, you may even be able to use all the talk of inflation to up prices and gain extra margin. But most founders will be struggling with rising costs that aren’t easy to pass on.

Inflation is equally a concern for employees, many of whom will ignore the “wisdom” of Bank of England Governor Andrew Bailey (who earns over £2,000 a day) and seek a pay rise in line with the increased costs. They’re naturally seeking to prevent a real terms drop in living standards. But how should founders address this issue with employees, many of whom will not have experienced inflation at this level before?

have the awkward conversations early

The one thing most of your employees want (apart from more money) is certainty. They will be looking at bills either going up steadily or shooting up alarmingly and want a salary bump to ease the pain. If circumstances allow you to do this for all staff and you are happy to, it’s an easy win. It’s more likely you won’t be able to. So how do you approach this? Like any difficult chat, it’s best not to wait for staff to come to you. In communications circles they call this getting ahead of the story. Take the initiative and make it clear what pay rises are available. Use your standard pay review processes and communications channels where you can. One thing the pandemic taught founders is the collective wisdom of employees. Many were happy to drop to a lower salary to allow all staff to be kept on. The same approach may apply here. Be honest and upfront and involve the team in the decision. Help them to see the long-term sense in this plan.

Think about non-pay rewards

There are other ways to reward staff and it may be that you can satisfy staff with a longer-term settlement of some kind. Consider offering long-term incentives, such as setting up a share option scheme such an Enterprise Management Incentive or a performance-related bonus scheme, such as profit-related pay. These can satisfy staff looking for more reward without negatively impacting the profitability or cost structure of the business. However, such schemes also have long-term implications. Make sure any such scheme is right for your business.

Consider a four-day week

There are also plenty of other ways to get round the no pay rise issue. The rise of the four-day week presents one such opportunity. Some evidence from pilot projects suggests this can be a surprisingly effective way to boost pay and morale without having to pay out more. And the evidence also suggests it boosts productivity and the four-day output is the same as five. Of course it won’t boost employees’ bank balances (unless they operate a side hustle on the fifth day), but they will feel richer and happier.

Help staff with a specific issue

RSL Renewables is a relatively young energy company. With its involvement in the sector, there is perhaps a natural affinity for and proximity to the impact on employees of rising energy bills after the price cap is removed in April. So RSL has taken the innovative step of removing this pressure by paying employees’ energy bills directly. It’s a smart move. This is a very real and tangible pay rise as well as being an excellent retention tool (at a time when people may be looking to leave the sector) and removes employee stresses about the cost of living. If the idea of committing to pay future bills is too much, even contributing towards them can generate the warm feelings towards an employer that rewards are at least partly designed to achieve.

Don’t penalise staff who ask about pay.

Any staff who do approach you about pay should be treated fairly and with respect. Despite how it may feel, if as the founder you are feeling the pressure to balance the books as costs rise but your prices don’t or can’t. And certainly don’t take the “we’re all in the same boat, I haven’t had a pay rise for X years” tone. Listen calmly and do your best to explain the reality of the situation (without scaring anyone). Staff are not being greedy. Well, some might be. Most are taking responsibility for making sure they can support themselves and provide for their families. Recognise this and never make people feel awkward or bad about asking for a pay rise. Those that are really set on getting one will potentially move elsewhere to get it.