Pay negotiations are no laughing matter

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Date: 16 December 2020

A HR manager negotiates a pay increase request with a female employee

According to Gordon Hall from The Gap Partnership, the concept of funny money is one where a small percentage equates to large shifts in value or profitability, or alternatively where a sizable percentage has a negligible impact on value and profitability. It is purely a matter of maths and how the statistics can confuse us so the number look funny.

As skilled negotiators, we need to be aware of the effects of these mathematical conundrums and make sure we're not be influenced by them. The next time someone says, "it's only 1%", be very careful! This could be a "funny money" scenario, and the 1% could in reality have a massive impact for you or the other party.

When it comes to pay negotiation, "funny money" is no laughing matter. Pay increase negotiations can be one of the most contentious and emotions over pay can run high for both sides. Employees will demand pay increases as a recognition of their worth and their efforts, but also to simply keep pace with inflation so that their standard of living does not deteriorate. Employers look closely at the impact of every percent or part-percent of a pay increase, as wage increases directly impact the bottom line. Labour costs are often the company's biggest overhead.

After several years of low inflation or even deflation in many parts of the world, pay negotiation is back on the global agenda. In the UK for example, inflation is now outstripping wage increases, and the pay freezes and wage caps that many have encountered are being challenged. We have all seen the public sector worker's anger at news of their wages freeze in November 2020. Politicians are arguing, as ever – one side about the injustice and unfairness of pay capping; the other about the need to control costs. The result of these arguments? Further entrenchment on either side.

Employee anger is intrinsically linked to the emotion that's woven into discussions about pay. Seeing colleagues or other sectors getting a bigger pay increase fundamentally undermines worker's worth. Those working in the health or education sector, or with friends and relatives who do, will be familiar with this story. Given these conditions, it's likely we will see public sector industrial action over pay disputes in the months ahead.

But the fact is, if it were possible to take the emotion out of pay negotiations, there's the possibility of finding the situation funny. The fact is that small percentage pay increases – 1% for example – equate to very little hard cash once tax and other deductions have been considered. Sometimes the final amount is so little that it would be hard to make it stretch beyond a couple of extra drinks in the bar!

On the flipside, total compensation packages or total value packages can add up to significant value to the employee. Much of the value created comes at a much lower cost to the employer than it would cost the employee to acquire the same benefits (pension, medical cover, life insurance, and even gym membership can all add up to significant value). As a result, offering benefits rather than pay increases is a common negotiation tactic and one that undeniably does create value for the employee.

For the employer, particularly when it comes to collective pay negotiations, the issue is the sheer size of the cost of any pay settlement. Every penny spent or avoided goes to the bottom line. For example, if an employer with 20% of its turnover spent on employment costs negotiated a pay freeze and turnover grew by 5%, then a 20% increase in profitability would result. That's "funny money".

In conclusion, if pay negotiators were able to stand back from small pay percentages and looked at the total value that can be created in their negotiations, then they may find small percentages funny. The tough reality is, however, that the emotional nature of pay negotiations makes it difficult for the negotiator to look at the total value opportunities, and therefore they are simply unable to see the bigger picture.

The ultimate challenge underlining all of this of course is that these benefits are not always of high value to every employee. Some employees simply want hard cash so that they can decide themselves what to do with it. As they may point out, a gym membership can't be used to buy drinks at the bar!

Copyright 2020. Featured post made possible by The Gap Partnership

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