Private sector pay awards to stay high in 2008, say employers

Employers expect to continue to award higher pay rises in 2008, despite predictions that headline inflation will fall and economic conditions become more difficult, according to a major survey by pay specialists IRS published today.

The IRS survey of 350 private sector employers - covering more than one million employees - finds that employers expect to settle a median pay deal of 3.5% over the coming year. This time last year, they predicted that the median pay rise would be 3% in 2007, but in reality pay deals have remained above this level throughout 2007 so far.

The vast majority (85.5%) of pay awards over the 12 months to 31 August 2008 are expected to be worth 3% or more, with more than one in three (34%) anticipated to be worth 4% or above and 13.2% worth 5% or more.

Other key survey findings include:

Company performance may subdue pay awards. Employers identified company performance/profitability as the key influence over pay awards in the coming year, followed by inflation and recruitment and retention. In line with predictions for lower growth next year, as many as 74% of pay deals are expected to be pushed downwards by company performance (compared with 54.8% in 2006) with 43.9% expected to be higher because of this factor (47.9% in 2006). In contrast, both inflation and recruitment and retention pressures are expected to provide a net upwards pull on pay settlement levels.

Private sector takes more note of CPI inflation measure. The retail prices index (RPI) remains the most important inflation benchmark for pay deals in the private sector, with 80.8% of employers saying that the level of RPI will influence their next pay review. Consumer prices index (CPI) inflation, however, which has been significantly lower level than RPI over the past year, will be taken into account by 24.3% of employers, up from 20.5% in 2006 and 15.8% in 2005.

Performance-based pay more popular. The proportion of employers using performance-based pay to reward staff is 66.6% this year compared with 55.1% last year. It is possible that operating in a high-inflation environment over the past year has given some employers bigger pots of pay to allocate, allowing them to be more inventive with how resources are spent.

IRS pay and benefits editor, Sarah Welfare, said: Despite the fact that headline inflation is expected to dip and growth to slow in 2008, employers are not predicting a lull in pay pressures next year - instead, they see this year’s pattern of higher pay awards continuing.

That may be because headline inflation, which remains relatively high at 3.9% in September, will already be feeding into negotiations for January 2008 pay awards, so the expected fall in inflation will come too late to pull the New Year’s pay deals downwards.

Latest on current pay settlements from IRS

IRS also publishes its latest pay settlement data today, showing that pay awards were worth a median 3.3% in the three months to the end of September 2007.

This means that pay awards remain comfortably above the 3% level at which they were a year ago but have eased slightly from the 3.5% median recorded the previous rolling quarter.

IRS monitored the details of 148 pay awards effective between 1 July 2007 and 30 September 2007, covering a total of 1,078,593 employees. Key findings include:

Three-quarters of deals higher than a year ago. A matched sample analysis of 38 pay awards reveals that 76% are higher than the previous year’s award. A further 11% are lower, while the remainder (13%) are the same.
Sharp fall in weighted median. The weighted median, the measure which weights pay increases by the number of employees each settlement covers, has fallen to 2.5% from 4% the previous rolling quarter, reflecting the 2.5% pay increase for half a million teachers from 1 September 2007.

Merit deals rise in value. The median paybill increase for performance-based pay awards rose to 4% in the three months to the end of September 2007, up from 3.75% the previous rolling quarter.

Public sector lags behind private sector. Over the year to September 2007, public sector pay deals were worth a median 2.7% compared with 3.4% in the private sector over the same period.