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Is there a case for regional pay?

In the recent, somewhat protracted, race to become the UK’s 56th prime minister, the Conservative membership found itself romanced with a range of policies promising to make taxpayers’ happy, the state smaller and the culture wars greater.

Among these was a proposal by newly-appointed Liz Truss to link public sector pay to local living costs, which she claimed would cut £8.8bn from the annual civil service pay bill. It was met with a wave of criticism including from within her party. 

Ben Houchen, Conservative mayor of Tees Valley, described it as a ‘massive pay cut for 5.5 million people… outside of London’. Others accused Truss of reneging on the government’s levelling-up commitment, before she quickly retracted the idea.

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While ‘the lady may be for turning’, US tech firms are not. Last year it was reported that several Silicon Valley giants including Google were slashing the pay of employees who were choosing to move out of main hubs, arguing that existing pay had reflected the high living costs in those areas.

Google has said it has no plans to implement such a policy in the UK, but with the pandemic reshaping worker migration and normalising remote working, is this a trend we need to prepare for? And if so, what are the implications for HR and employees?

Stephen Bevan, head of HR research development at the Institute of Employment Studies, doesn’t think a large-scale move towards regional pay policies is on the cards for the UK, mainly because of the practical difficulties in making it work.

He says the idea of regional boards in the public sector had been considered before under previous governments, but abandoned due to the complexity of multiple pay negotiations. 

“Pay has always been determined by national agreements,” says Bevan. “What we found the last time [this was attempted] was that the trade unions have far better networks and information, and ran rings around local managers. 

“You ended up with NHS trusts in Yorkshire fighting each other for nurses by leapfrogging pay, which is not the way you want to spend your time as a local manager in the NHS.”

Katharine Nundy, director of The HR Branch, thinks employers in the private sector are unlikely to consider regional pay for similar reasons.

“It would require complex management, multiple sets of negotiations with trade unions and employee bodies, and is unlikely to achieve much for employers,” she says, noting that within regions, there are disparities that employers also need to account for. 

“For example, the East Midlands contains vast swathes of rural areas alongside city regions such as Derby and Nottingham. Pay in the South West, particularly in Cornwall, has been much lower than the UK average, and people living in these areas are struggling to be able to afford housing due to the number of second home owners in the regions pushing prices up.” 

She says cutting pay in regions could be seen by employees as an act of attrition and lead to a staff exodus – which no employer can afford in the current market.

However, given the pressure that inflation is putting on many businesses, some employers might be tempted to follow Truss’ lead and consider regional pay as a means of cutting costs, particularly as workers continue to migrate away from big cities. 

Noelle Murphy, senior HR practice editor at XpertHR, says regional pay policies could leave firms open to equal pay claims. 

She says: “Equal pay claims are notoriously difficult to predict and can easily get out of control – you only have to look at all the group equal pay claims in the 1990s and 2000s against local authorities and health bodies, some of which spanned decades.

“An employer can have a defence to an equal pay claim if it can show that the reason for the inequality of terms for equal work is due to a ‘material factor’ that does not amount to indirect or direct sex discrimination. However, using location as the material factor to justify unequal pay is not something that’s been tested in the courts.”

Increased remote working has created more opportunities for inclusion, particularly for disabled people, and women who still perform the bulk of caring responsibilities and often need to stay closer to home. 

"Some employers are forgetting the rudiments of setting pay"

Ali Hanan, CEO of EDI consultancy Creative Equals, says cutting regional pay would have harmful consequences for these groups. “We are likely to see that the [cost of living] crisis will disproportionately impact those more vulnerable groups like women due to increased childcare costs and disabled people due to fuel costs,” she says.

“Regional pay policies and pay cuts will only exacerbate this further and add to greater inequality in our workplaces. ‘Levelling up’ is about levelling the playing field so everyone benefits from the same fair wages, wherever they live. Regional pay is not the solution.”

Murphy suggests that, if moving to regional pay, HR might want to start with carrying out an equal pay audit to address these concerns. Irene van der Werf, head of people at Omnipresent, agrees that accurate data is vital to inform and shape these decisions. 

But she says that ensuring employees understand the process and rationale behind regional pay is equally important. “Creating transparency and promoting a culture of openness is a must,” she says.  

Equally, employers need to be sure that regional pay policies don’t undermine their ability to attract talent.

Previous critics of these policies have argued that cutting pay drains local labour markets and makes it difficult to attract talent to cities outside of London as well damaging employee engagement. 

“You need to test your chosen methods,” adds van der Werf. “Are you getting the talent you want with the chosen approach? Equally, does it help you retain your best talent?” 

She claims that any employer considering implementing regional pay needs to start by asking itself ‘what is equity in compensation?’. It’s a point that Bevan makes well, arguing that employers are “crossing a boundary” when considering employee outgoings as a determiner of pay. 

“We’re seeing a creeping away from the idea that pay is attached to the demands, skills and qualifications required to perform a post,” says Bevan. “We’re in that slightly muddled area where some employers seem to be forgetting what the rudiments of setting pay are.” 

Regional pay certainly appears to be a rabbit hole that could lead employers to unexpected consequences. “You’re opening up the possibility that people will say, ‘well, if you’re now prepared to take into account my outgoings in terms of my pay, here are my outgoings, they’re very high, so you should be compensating me for that’. And that way lies a great deal of complication, as well as problems with fairness and so on,” he adds.

Most organisations are concerned with how to support staff through the cost of living crisis rather than actively making their lives worse by cutting pay.

“Many employers are trying to be compassionate, and thoughtful about the cost of living,” says Bevan. “They realise that actually the crisis is going to get worse and they feel an obligation to do something to support their employees.”

In fact, Nundy notes that many organisations have found themselves reviewing pay more often than they had done previously – something that would be harder to do if regional pay policies were in place. 

Recent years have seen firms and workers adjust to unprecedented change; mass remote working, furlough, loss of earnings and an incredibly tight labour market. There have been many lessons learnt during those challenges, among them the importance of supporting staff through difficult times. 

The idea of ‘complicating’ pay structures now and cutting compensation when employees are at their most vulnerable holds very little appeal, whether you work in HR or No.10.