Inflation adds upward pressure to 2007 pay rises

Many people can look forward to a bigger pay rise next year as inflationary pressures force employers to contemplate more generous pay settlements, according to a major survey by pay specialists Industrial Relations Services (IRS).

Almost eight in 10 (78%) private sector employers expect pay awards in the next year to be worth 3% or more, according to the latest annual IRS Pay Prospects survey, the 18th in the series.

Over the past year, just over half (52.9%) of awards were at this level.

Overall, survey respondents expect pay awards in the next year to range from 1.2% to 20%, with a median forecast pay rise of 3%. Half of all pay deals next year are expected to be worth between 3% and 4%.

IRS private sector Pay Prospects survey 2006/07 ñ other key findings include:

Comparisons with previous year. Almost two-thirds (65.7%) of employee groups can expect their next pay award to be at the same level as their most recent increase. However, more than a quarter (27.3%) of pay rises in the next year are expected to be higher than the previous year; and just 7% of employee groups are predicted to receive a lower pay rise in the year ahead.

Key influences on pay. The key influences on the level of pay rises over the next year will be company performance/ability to pay, and inflation. However, company performance is expected to produce a net downward pull on settlement levels, while inflation is expected to provide a significant upward pressure on the level of pay awards. Of the companies that take inflation into account, almost two-thirds (64.4%) of respondents said that they would be looking to set their next pay award at the level of their chosen measure of inflation, one-third (32.2%) intend to pay above inflation and just 3.4% predict that they will pay a below-inflation pay increase.

Inflation measures. Despite the chancellorís edict to the public sector to look to the 2% CPI inflation target when setting pay rises in the year ahead, private sector companies are sticking with the RPI headline measure of inflation. More than 80% of the employers using inflation to guide the level of pay increases said they would use RPI inflation as their measure of choice, although the proportion saying that they would also consider the CPI measure was 20.5% ñ higher than the 14.9% recorded in our last survey.

Reward systems. Asked what reward systems were used at their company, more than half (55.1%) of firms report that they use performance-related pay for at least some of their employees, making this the most popular reward strategy for eight consecutive years. Market-linked pay (used by 44.4% of companies) and cash bonuses (44.4%) are the next most commonly-used reward tools.

IRS Pay and Benefits editor, Sarah Welfare said:

ìWe have found that the majority of pay deals in the past year were worth less than in the previous year. This pattern could well be reversed over the 2006/07 bargaining year.

While we continue to expect many employers to settle for a 3% pay rise in the coming year, with headline inflation continuing to rise, there is a significant upward pressure on pay increases and we expect to see the proportion of deals worth more than 3% increase significantly.î