Facing into a higher inflation environment

This is an issue which we have been thinking about at 3XO so it’s great to have the opportunity to put our thoughts down about how to manage the risks that high inflation brings over the next few months. In terms of risks, we see these as:

1. Recruitment/retention
2. Industrial relations
3. Well-being
4. Behaviour

Recruitment/Retention

The first risk is clearly recruitment and retention. The increasing cost of living is likely to push more employees in all parts of the economy to consider whether there are higher earning opportunities elsewhere, in what is already a tightening labour market. How to respond to that?

The first action is to identify key members of the workforce who are a flight-risk. If the issue for these individuals is earning opportunities, actions should include (highly) targeted salary adjustments, retention awards and the usual range of remuneration actions. And related to this is a question of whether these individuals actually need to be replaced? Does this environment create an incentive to make changes to operating models, e.g. through automations and/or outsourcing?

Conversely, opportunities may be created to bring in talent, where individuals elsewhere are finding the lack of earning opportunities in their current organisations is causing them to consider a new employer.

Questions:
• Who are your key staff (at all grades) and what targeted measures may be needed, preemptively, to minimise flight risk?
• What opportunities may exist to make changes to the business operating model to minimise the impact of exiting staff, e.g. tactical automation and outsourcing opportunities?
• Are there opportunities to attract talent, e.g. from businesses less agile and slower to respond to this new environment?

But there are other ways of looking at this challenge. We think there is merit in looking at a wider range of earnings opportunities which are linked directly to productivity.

This includes reviewing overtime rates (and providing more opportunities to earn overtime) and adjusting commission rates, i.e. channel the response by creating more productivity aligned ways for employees to earn. This won’t remove the need in all cases for increases in fixed remuneration, but it would reduce the pressure. In essence, this is about changing the reward mix (see below also).

Question: What opportunities exist to increased variable earnings opportunities for staff?

There may be other opportunities to adjust the reward mix. For example, to what extent is reward tied up in deferred arrangements that are not performance / productivity related: the pension scheme is the main example of this. Is there an opportunity to accelerate changes to the company’s pension arrangements to bring forward earnings opportunities by switching more of the employment cost to shorter term reward.

Question: Are there elements of current employment costs which could be reoriented to bring forward earnings opportunities? In particular, looking at staff benefits including pension?

Industrial relations

The second risk relates to industrial relations. A higher inflation environment is, we believe, a gift to trade unions. The universal impact of increasing costs of living on all employees lends itself to calls for collective action. But this is not necessarily a bad thing. A well developed and maintained set of relations with unions can provide a single convening point for discussions and unions are relatively professional and economically rational in how they approach negotiations on behalf of their members. The risks are that the they do not have the information they need on the actual economic position of the enterprise, and also that management (including HR) do not have the technical skills required to bargain effectively (it is a know-how dependent area).

Question: What is the company’s current industrial relations landscape? How confident are you that relationships with unions are where they need to be, at company, country and site level?

Wellbeing
From a risk perspective, we expect there to be increased pressure on well-being. This exacerbates the existing post-pandemic pressures, as workers wrestle with the pressures of increased cost of living. Aside from the general humanitarian need to make workplaces and work healthy, practically lower levels of well-being are likely to impact productivity, either through reduced effort through distraction or through lower levels of workforce availability due to increased sickness absence. It would be prudent to look at what measures companies and sites have in place to support employee wellbeing, as well as ways to support workers whose financial pressures may drive them to poor solutions (e.g. pay day loans) to deal with short term cash pressures (which may be better addressed through payroll advances).

Question: How confident are you that well-being can be tracked at company and site level and what responses are available?

Behaviour

The last area to highlight is risks around behaviour. For a very small proportion of a workforce financial pressures may be so great that they create incentives to commit fraud. This will be exacerbated where these staff are vulnerable to approaches from criminal third parties.

Question: How confident are you that the control environment is robust and sensitive to the heightened risks created by a higher inflation environment?