Written by
Charles Cotton

29 Sep 2016

Brexit: What does it mean for reward professionals?

29 Sep 2016 • by Charles Cotton

As David Davies, Secretary of State for Exiting the European Union, said on the 5th September, Brexit means: “leaving the European Union, so we will decide on our borders, our laws and the taxpayer’s money. It means getting the best deal for Britain: one that is unique to Britain and not an off-the-shelf solution. This must mean controls on the numbers of people who come to Britain from Europe, but also a positive outcome for those who wish to trade in goods and services.”

What does this mean for how employers reward and recognise their employees? I think that Brexit could influence reward practice in one of three ways. The first is in terms of our demand for people with the right skills and attitude. The second is in terms of the supply of workers with the right skills and attitudes, and the third is in terms of how we manage these people once they are in the workplace, such as how we pay them or the benefits we offer.

Delving deeper

Let’s look at each of these in a little more depth. Our demand for talent is influenced by such factors as how the economy is doing, our business strategy advances in technology, the environment, politics, legislation etc. Those might manifest themselves in many different ways, such as a change of Government, new legislation that effects our workplaces or the development of robots to complement the workforce. The overall point is that our talent needs are constantly influenced by outside forces. Brexit is another to add to that list.

Brexit could have profound implications for employee demand because our future trading relationship with the EU will impact our economy and business strategies. Possible future trading arrangements include: a  ‘soft Brexit’ solution similar to the one the EU has with Norway; a bilateral agreement between the UK and the EU, as exists between Switzerland or Canada; or we could no specific agreement with the EU, with the UK falling back on the default World Trade Organisation rules instead. Each option comes both with its own business opportunities and challenges. Of course, Europe is just one trading area, and there will be both opportunities as well as challenges as we forge deals with other countries.

Brexit also has the potential to impact the labour supply. David Davies said that Brexit means that we can control the numbers of people who come to Britain from Europe, but what will that control look like? Will there be a cap on number of EU-citizens that are allowed to work in the UK and how will this cap be set? Theresa May has already appeared to ruled out an Australian style points system, so we will simply expand our existing five tier visa-based system for non-EU nationals to EU-nationals? What will be the implications for EU nationals already working in the EU, will they be able to stay? Will the want to stay? The answers to these questions will influence the number of people in the jobs market. The challenge is that many of them cannot currently be answered.

Finally, Brexit will influence what goes on in the workplace. For instance, will employers respond to a possible drop in the supply of employees, by targeting other employee groups such as those past the state pension age or ex-offenders? Will we see more investment in training and development to grow skills internally? Will employment regulation concerning agency workers regulations, TUPE and the working time directive change? Will there be moves to change such benefits as paid holiday, sick pay, parental leave, automatic enrolment or the national living wage? If so, how should your organisation respond?

What is the impact on supply and demand?

In addition to helping our organisations assess the potential impact that Brexit may have on the employee supply and demand, it is another opportunity for us to re-examine the design of organisations, work and jobs to ensure that staff both want to and are able to contribute to the success of their employer.

When it comes to how we respond to Brexit, we need to be able to help employers think through the various potential business options and the possible employee engagement consequences, such as plans to transfer employees or relocate operations.

It is also important for us to deal with employee concerns about their pay and employment prospects. We should be proactive and explain to them what could be the likely employment implications for the firm of Brexit.

On the pay front, it is possible that economic uncertainty my feed through into low pay growth for the coming year. Employers should explain to their workers what is likely to happen to pay and why, so that employees have an understanding of the context in which salary and bonus decisions are being made.

If employees are only going to see their pay increase moderately over the next few years, then it’s important that chief executive pay doesn’t increase significantly. Employees will rapidly become disillusioned if they see that their CEOs enjoying large salaries and bonuses if they have seen a real terms fall.

In some instances, it’s OK to say that we don’t know what the consequences of exit may be because it is too early to know and it will depend on a variety of factors including what kind of deal is eventually negotiated.

When it comes to pensions, the decision of the bank of England to cut interest rates has affected Gilt yields and increased defined benefit (DB) pension deficits, while uncertainty about long-term economic growth may have negative consequences for employer covenant strengths and deficit recovery plans.

To bolster the employer covenant, HR should be busy looking at various business opportunities so that firms are better able to meet their pension liabilities. For instance, moving towards a high-quality product/service strategy, job and work redesign or an export drive to new markets.

Difficult conversations

There is also going to be a potentially difficult conversation with employees if the focus of the reward budget has to switch from pay and benefits and towards paying off the increased pension deficit, especially with those staff who are not members of the scheme.

The increased coverage in the media post-Brexit about the rise in the scale of DB pension deficits, should encourage reward professionals to consider how they respond to members anxious about what could happen to their supposed ‘gold-plated’ retirement plans. We and trustees need to ensure we explain what’s happening, how and why, and the possible implications.

When it comes to defined contribution (DC) pensions, HR also has a crucial communications role. Many young DC pension members may have been worried about the volatility in the value of their pension caused by the recent current economic and political uncertainty. It is important to suggest that now may not be a great time to stop their pension contributions, and that over time they should be able to ride out market turmoil and pick up some bargains along the way.

There’s also the human issue of how to respond to employees whose retirement plans have been suddenly dashed by recent events. Those aiming to turn their DC pot into an annuity will be depressed to see that it now buys less as annuity prices have risen on the back of a fall in Gilt yields (which are used to calculate annuity prices).

Similarly, those workers nearing retirement who were planning to draw down income from their pension pot to fund it could face problems if they are heavily invested in shares. If the price of shares drops, then they will need to sell more of them to get the same level of income. This means that they will go through their pension fund quicker and may run out of money sooner.

Employees in a DC plan may need to postpone their retirement plans which has people management consequences for their employers. Again, HR must help their organisations explore the possible workplace issues if a significant number of staff decide to defer their retirement, in terms of work and job design as well as people management and development issues.

Overall, it is important for HR and reward professionals to get on the front-foot now and start thinking through the potential consequences of Brexit, how we may respond, what the alternatives and possible consequences may be and how they support their employees’ physical and mental well-being.