Pay rise budgets axed as employers slash costs

The Covid-19 crisis has seen one-third of UK employers freeze pay while most others have reduced pay rise budgets. But companies are still expecting pay rises to bounce back in 2021, a report has revealed.

According to global risk management firm Willis Towers Watson, businesses at the beginning of this year were budgeting for an average of 3% pay rises. But the economic impact of the pandemic means 35% of UK employers are planning to freeze pay and postpone pay rises. Many (39%) have already reduced annual bonuses. Overall, organisations have had to revise pay budgets down to 2.7% for this year, a 10% budget cut on average. 

Willis Towers Watson’s Salary Budget Planning Report, which covered 15,000 employers across 132 different countries, showed that one-in-five (19%) businesses in the UK had already taken steps to reduce the size of their workforce, while a further 37% were either planning to, or considering, cuts because of the pandemic.

The sectors least affected by the pandemic in terms of pay and conditions, included insurance, banking and financial services. The most affected included retail, leisure and hospitality.

In further measures to preserve cash, 60% of employers had implemented or were considering unpaid leave policies that were either voluntary or mandatory, the study revealed.

Pay rise projections for 2021 were more optimistic because UK employers anticipated that pay budgets would bounce back closer to pre-Covid-19 levels, at 2.9%, researchers said.

However, the proportion of companies planning a salary freeze next year was still six times higher now than before the pandemic (12% now vs 2% before).

According to the report, the UK was following a similar pattern to most other G8 economies where employers were planning for lower 2020 pay budgets. The exception was in the US, where pre- and post Covid-19 pay rises were expected to remain steady at 3% in 2020 and continue at the same level in 2021. Recent spikes in infection rates in the US, however, may affect the figures.

Similarly, Canadian employers have only cut pay budgets by a 0.1% margin this year (3% to 2.9%), before recovering back to 3% in 2021.

In Europe, the study found that employers in the UK, France and Germany were anticipating their “recovered” 2021 pay budgets would still be lower than their pre-Covid-19 planned 2020 budgets. Only Italy was anticipating a recovery back to pre-coronavirus levels next year.

The study showed that globally the five worst hit sectors for pay freezes or postponed pay rises in 2020 are retail, where 58% of companies have frozen or postponed pay rises, followed by media (51%), leisure and hospitality (50%), manufacturing (49%) and automotive (44%).

The industries least affected by pay freezes or pay rise postponements include insurance (11%), banking (16%), personal & household services (17%), chemicals (18%) and financial services (23%).

Keith Coull, senior director in Willis Towers Watson’s Global Data Services business, warned that the impact of the coronavirus would be long-lasting: “The full extent of the economic impact of the pandemic is yet to play out as some companies froze pay this year to shore up cash flows, whereas others had already announced pay rises before the pandemic hit, so may feel more of an impact next year, he said.