UK pay pressures mounting but awards stand at 3%

Over the next 12 months, almost nine in 10 (87.5%) private sector employers expect to award their staff a pay increase that matches or exceeds their previous settlement. But how much longer can UK pay awards stay at 3%, ask pay experts IRS, in their annual survey launched today in IRS Employment Review.

In the year running from 1 September 2004, employers predict that four in 10 (40.4%) pay settlements will be worth 3%. When making their pay decisions they will be weighing up a number of conflicting pressures, including their ability to pay and the rate of inflation.
However, as headline inflation edges upwards, employees could see their pay rises fall behind cost of living increases if the 3% pay benchmark is not breached.

Key findings:

The manufacturing sector is less likely than the service sector to make higher pay awards in the year ahead. Six in 10 (60.2%) manufacturing pay awards are tipped to be the same. A quarter (25.4%) are likely to receive a higher increase while 14.4% are facing a lower settlement.

In the service sector, more than one-third (36.4%) of bargaining groups are expected to receive a higher award, 53.1% are forecast to be worth the same as the previous year, while just one in 10 (10.5%) are looking at a lower settlement.

Key influences on pay

The main factors driving the level of future pay awards continue to be company performance and ability to pay; the rate of inflation, and pay levels in other organisations in the same industry sector.

More than half the respondents (54%) expect company performance to exert an upward pressure on the level of their next pay award, although a further 44.2% believe it will serve to keep the level of pay settlement down.

The rate of inflation is forecast to put upward pressure on 38.7% of pay settlements over the coming year, while 29.5% of employee groups could see this measure forcing settlements lower.

Clear differences exist between the factors likely to influence pay settlements in the manufacturing and production and service sectors. The inability to raise the price of products and services is likely to be an issue for one-third (33.5%) of manufacturing and production pay settlements, compared with just 17.6% in the service sector. Pay levels in the same industry are much more likely to be an issue for service sector settlements (65.6%) than those in manufacturing and production (41.6%).
Pay awards

Four in 10 (40.4%) of pay awards with anniversary dates from 1 September 2004 to 31 August 2005 are expected to be worth exactly 3%.

The proportion of awards expected to be less than 2.99% has dipped to 26% (from 32.9% in 2003).

A fifth (18.6%) of employee groups are looking at a pay award in excess of 4% (up from 13.7% last year).
Reward strategies

Merit pay and cash bonuses are the most frequently used remuneration systems. Almost seven in 10 (68.7%) surveyed organisations deploy a merit pay system - the most favoured reward strategy for the sixth consecutive year. The cash bonus is the second most popular reward tool, used by more than half (57.9%) of the surveyís respondents.

Skills-based pay continues to gain popularity. More than one-third of respondent organisations (35%) currently use skills-based pay as part of their reward strategy. This compares with 27.9% in 2003 and just 10.8% in 2002.

Nearly one-third of surveyed employers (31.6%) use employee share schemes. This compares to 21.1% in 2002.

The most popular planned change among respondents - for the fifth consecutive year - is flexible benefits, with 15.2% indicating that they would introduce this within the next year.

IRS Employment Review pay and benefits editor, Sheila Attwood said:

ìThe IRS headline measure of pay awards has remained remarkably stable over the past year at 3%. Although many employers are looking to replicate this over the coming year, there is a real possibility that pay rises will move above 3% in the early months of 2005, in response to higher inflation at the end of this year. But this is unlikely to be sustained beyond that time, and pay settlements will fall back to our 3% plateau.î