Rising inflation puts upward pressure on pay…

Pay increases in 2007 may rise above 3% for the first time in more than five years as inflationary pressures build in the economy, according to a survey by Personnel Today’s sister publication, IRS Employment Review.

Its research shows that more than a quarter of employers believe that the pay rise they award for the coming year will be higher than the previous settlement, with the services sector making most of the running.

With inflation forecast to hit 4% or more by the end of 2006, and three-quarters of employers basing pay rises on the Retail Price Index, this will increase pressure on wage setters to be more generous in the year ahead.

But the survey also reveals that two-thirds of employers believe they will be able to keep pay rises in 2007 at the same level as those in 2006, and forecasts by employers suggest that they should just about be able to hold the line at 3% for another year.

If not, it will be the first time that pay settlements have exceeded 3% since April 2001.

This is the 18th annual IRS Pay Prospects survey. It sought information from 216 private sector companies, which together employ more than 485,000 people. During the course of the year, details of around 1,200 settlements are added to the IRS pay databank.


…but employers will fight to keep rises under 3%…

Nearly one in five employers in the services sector expects to have to raise pay levels by 5% or more in the year ahead, the IRS survey reveals. By contrast, just one in 20 manufacturers expects to settle near this level.

But the research shows that around four out of every 10 employers across all sectors expect to have to raise wages by just 3%.

The most important business factors taken into account when agreeing pay rises are: company performance (cited by 90% of employers) inflation (75%) productivity (34%) the ability to pass on costs to customers (18%) and pension costs (12%).

The most common labour market influences are: recruitment and retention (43%) the national minimum wage (NMW) (14%) and the risk of job cuts (8%). Pay comparability is an issue for more than half (55%) of the companies in the survey.

The survey also shows that company performance is more likely to be an issue for manufacturers, but that the NMW is three times as big an influence in the services sector (17%) as it is in manufacturing (6%).

…and all forms of reward are being cut

While the annual pay review remains at the centre of the reward specialist’s year, most have to juggle a number of other elements in the overall reward mix, the research shows.

More than half those surveyed (55%) currently use merit or individual performance pay, with market-linked pay (44%) and cash bonuses (44%) also common. But the study has shown a fall in the numbers using merit awards over the past two years.

For the seventh year running, employers cited the introduction of flexible benefits as the most likely change to their reward packages over the coming 12 months. However, experience shows that these intentions are rarely carried through in practice.

Another widely planned reform this year is the introduction of competency-based pay scales.

With the stockmarket having been through a bumpy few years, there is also little indication that employers are looking to introduce employee share schemes to any great extent.

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