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Beyond The Everyday

Beyond The Everyday: How The Social And Economic Environment Is Impacting The UK’s Business Landscape

Wednesday, 7 December 2022

Businesses have had a very changeable three years. Following a crippling pandemic which almost brought the world to its knees, firms have recovered and were finally getting back to normal before this year’s volatility. The fact of the matter is, though, we weren’t fully back to normal. Supply chains are still not open as they were - driven largely by China’s continuing issues with COVID and in Europe, the after-effects of Brexit are still being felt in terms of getting to grips with the new legislation. World trade, which obviously has an effect on markets, was nearly but not quite back to where things were in 2019.

New challenges have also come to light. A hot talent market has led to rapid wage growth, as employees take advantage of the fact there’s not enough people to fill the roles and to counter the financial pressures of inflation. The strength of the dollar has made goods more expensive, and liquidity constraints driven by falling share prices and a cost of living crisis means operational costs have greatly intensified.

As Rob Lyons, Head of M&A, Corporate Services & Deputy Company Secretary, Marks and Spencer, made the point, trying to help lower paid colleagues through the ongoing cost of living crisis is becoming increasingly difficult. Investors want returns yet raising pay by 20p for those on an hourly wage costs tens of millions. This, alongside the rapidly increasing cost for energy and goods, means that a firm’s outgoings, especially those in the retail sector who use large amounts of energy in their stores, have rocketed. As a result, companies are required to continuously monitor how much this is hurting the balance sheet. While more volatility is likely on the way, the need for a strong pound has never been greater.

Jeavon Lolay, Head of Economics & Market Insight, Lloyds Bank made this point exactly. The US does not have the energy crisis engulfing Europe, nor China’s COVID-related restrictions. Plus, its status as a world leading economy makes the Dollar a safe haven in uncertain times, helping to strengthen it against other major currencies.

Of course, this is a challenging maelstrom for firms to deal with, but David Ellis, Partner - Strategic Reward Advisory, BDO UK outlined in three ways how firms can get on the front foot.

1. Pay reviews need to be effective

Pay reviews are a matter of course for firms, as employees look for enhanced remuneration following another 12 months of employment and loyalty. While this is usually a standard 3% increase or whatever the balance sheet permits, this year, it needs to be the most effective and stringent firms have ever undertaken. This is because of the financial challenges that lie ahead. Pay needs to be applied strategically - be that 0% or 25% increases, any reward should be based on how an employee’s skills fit into the matrix of the business, and the value they can deliver over the next 12 months.

2. Firms need to land their narrative around pay

This will require new levels of honesty, but for nearly all firms (perhaps bar those in the energy sector), profits will be down and costs up for the next 12 months, and employees need to know that and justify value. Yes, they might move thanks to a rampant talent market, but for firms to remain profitable, they will either need to sell more, put their prices up or generate savings. Employees should be aware of these pressures, and understand how this translates to pay.

3. It’s not all about cash…but mostly

Any cost of living interventions need to be meaningful. From food discounts (offered by the likes of Marks and Spencer and Coop) through to one off payments, any provisions need to help employees quickly. Share plan options could help drive loyalty and encourage bullishness around returns thanks to current low valuations, but realistically, employees in the here and now want cash as they fight rising bills. This doesn’t mean the overall value of the benefits package should not be communicated. A rival might be paying more in terms of gross pay, but overall value and employee wellbeing should be the main driver of conversations.

Another theme from the discussion was how market volatility would affect public finances, with the UK set to see borrowing levels increase in light of rising interest rates. This will undoubtedly put pressure on public sector pay, and how this might impact those wishing to work in the sector. There is no doubt the gap in pay has widened. While public offices have better pension provision, the competition of the private sector has allowed employees there to ride the talent market and negotiate favourable raises. We may well see no funds available for public sector raises, leaving the real possibility that we might see teachers, nurses etc leaving roles for higher paying jobs in the private sector, bringing into question the sustainability of public sector working.

Our panel noted how teaching assistants have started moving into retail to achieve higher pay, so any financial updates regarding other state pay could cause ruptions in the great public vs private pay debate. A clear consensus from the discussion was that the markets want a clear and costed strategy - something currently not forthcoming from the UK government. Information on how the tax cuts will be paid for is vital to help restore some order. The panel informed us that traders are now headline watching, making an indication of how the FTSE might respond almost impossible - the market is spooked and needs reassurance.

But what does this actually mean for firms?

It was noted from the panel that we are lucky to have an institution such as the Bank of England at hand to help calm markets when required. However, this is not a long-term solution, and won’t help firms with falling share prices.

One point made by the panel was that now will be a true test of businesses’ ESG commitments. With EQ’s own Shareholder Voice research showing that 34% of UK investors have divested from ethical stocks in search of greater returns, the panel noted that despite this knee-jerk reaction, ESG is too far developed to simply drop in times of turmoil. The panel noted the pressure on firms to demonstrate ESG commitments was “absolute” - be this executive pay through to social commitments. ESG has a direct impact on valuations, so while it might seem like a lesser priority in difficult times, it shouldn’t be.

One strategy could be for firms to focus on value over price - a strategy Marks and Spencer is pursuing. Competition will always be rife when it comes to price, but demonstrating value could help persuade consumers or stakeholders to pay more for better quality - be this for a jumper or building equipment. Sustainability doesn’t simply have to refer to carbon, and longer lasting materials will prove more valuable in the long-term. A jumper that lasts 10 years will be far more cost effective than a fast fashion item which lasts one winter.

So what will make a winning organisation over the coming months?

  • Lots of brands are struggling - this could lead to insolvency and more talent opening up
  • Be explicit about what you want from employees and what you expect them to deliver, so everyone is working together towards the same goal
  • Be agile in a changing economic outlook. Well run firms will survive and following this correction, there will likely be market share up for grabs, alongside more available talent

Despite the seeming pessimism around UK and global markets currently, there is light at the end of the tunnel. Inflation will deteriorate through 2024, as energy concerns and food prices reduce. Consumers will feel these effects until then, likely leading to low to no growth, but after that, there may well be a springboard for markets to reset. Firms will need to ride this wave too, but with the right strategy in place and an agile approach, they may well position themselves well for growth once the storm subsides.

Key takeaways:

  • Economically it’s difficult, as a rising US dollar and increasing costs hammer the balance sheet
  • Therefore, costs must be justified but employees valued
  • Review pay strategically and own the narrative around remuneration
  • Don’t put ESG commitments to the side despite volatility
  • Adopt an agile approach to help navigate the changing situation