UK Compensation Flat, Despite Historically High Inflation

GBP (£) inflation reached a 40-year high in October 2022, hitting over 11% inflation. As the cost of living has increased, inevitably companies are asking how, if at all, they should adjust their compensation practices for their current employees.

These two questions come up most often:

• One-off Raises: Should companies do one-off market-based compensation changes for their current employees to meet rising inflation?
• Size of Compensation Changes: Should companies increase their average raise during their Fall/Winter 2022 compensation reviews to meet an increasing cost of living?

To test these questions, we used Pave’s compensation database, which includes more than 16,000 real-time compensation data points from employees in the UK, to review the number and the size of compensation changes month over month and year over year in the UK. Interestingly, the data analysis showed us that despite high inflation in the UK, the size of compensation changes and the frequency of them has not increased.

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One-off Raises

We are not seeing companies with employees in the UK offer significantly more raises in the Fall of 2022, where the average inflation rate was 10.4%, compared to the same period in 2021, where the average inflation rate was 3.5%.

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The total percent of employees with compensation changes in 2021 between August - October was 9.75%; in 2022 in the same months, 10.15% of employees received raises — only 0.4% more.

Companies are not pulling forward their compensation review cycles to put more money in their employees’ pockets, nor are they doing one-off compensation review cycles to meet inflation.

Size of Compensation Changes

Despite average inflation more than doubling between October 2021 and October 2022 (from 4.2% to 11.1%), the average raise for an employee has not meaningfully increased. For instance, in October 2021, the average salary change was 11%. In October 2022, the average salary increase was 12%.

As of November 2022, UK employers are neither giving larger raises nor giving raises to more employees as inflation increases. There appears to be no significant relationship between the strength of the Pound and the average compensation change given to employee.

Three Hypotheses

We know that the cost of living is increasing in the UK and that UK employers are not paying employees differently because of it. The question becomes: Why not?

At Pave, we have three hypotheses:

1. Timing: Most compensation changes in the UK happen at the year end (or just after the year end) — this analysis only goes up to November 2022. Companies could be planning to give larger compensation changes in their year-end compensation review cycles, or could be planning on giving more people raises in association with the rising cost of living. These changes simply haven’t happened yet.
2. Macro-Economic Climate: The private investment market has cooled globally in the second half of 2022 and companies are heeding the warnings of investors like Sequoia to extend their runway. Accordingly, there is less appetite to increase payroll expenses, despite inflation.
3. Cost-of-Labor: Companies give more aggressive increases in compensation when the labor market is hot — that is, the cost of labor is high — not necessarily when the cost of living is high. With the cooling macro-economic climate and widespread tech layoffs, the cost of labor has not increased despite the cost of living increasing.

Whether or not this decoupling of GBP inflation and compensation continues beyond November 2022 is yet to be told. However, as it stands, our data shows that companies with employees in the UK are not giving more raises or larger raises in association with currency inflation.

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