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Pay trends in 2011

Posted on January 25, 2011

Deborah Rees of Innecto Consulting discusses their predictions for pay trends in 2011 and the reasons behind them.

Most sources believe that the UK Economy will continue to grow in 2011, that company profits will increase, and that the prices of goods and services will continue to rise. However the aftershocks of the recession are still being felt - unemployment remains persistently high and there is the fear of a slowdown in both growth and consumer spending.

The opinion on what impact this will have on pay for 2011 is mixed and - as the example below shows - quite contradictory. Take the recent survey conducted by XpertHR, which found that an overwhelming majority of employers (80%) expected to award pay increases in 2011. The British Chamber of Commerce's survey however, found that less than half (45%) of all employers were planning to increase pay.

In the absence of consensus of opinion, we look at some of the key variables that help set UK pay rates and, with some trepidation, give our predictions on pay growth for the coming year.

Key reasons why pay will rise in 2011

Pay continues to trend upwards: The latest data from IDS shows that private sector pay rates in the UK have been increasing steadily for the past 18 months.

Median pay awards increased from 1.2% in the first quarter of 2009 to 2.2% for the fourth quarter of 2010. The gap between the lower and upper ends of the settlement spectrum, as shown by the blue and green lines in the graph below, narrowed significantly over the same period, implying a continuing upward trend for the coming year.

To offset rising prices:  It is expected that January's VAT increase will cause another rise in the price for goods and services. Prices have been running ahead of wages for most of 2010 and a re-alignment is probably overdue. We expect the next price jump to galvanise workers and unions into pushing for pay increases to offset previous losses. Many employers will need to make concessions on this front to minimise disruption and avoid industrial action.

Because companies can afford it: Many workers have had their pay frozen or even cut during the past two years. This was grudgingly accepted as the price worth paying for 'keeping your job' when companies' profits were in decline. The implicit contract struck with workers at the time was that pay would be restored once employers could afford to do so.

Profitability in the economy is once again back on an upward trend following the decline of the period 2008/09. Workers will now be asking bosses to make good on their promises and compensate employees accordingly. For employers not to deliver would create a breakdown in trust with the potential to lead to protracted disputes. In short if an employer can pay, it will pay!

Key reasons why pay will fall in 2011

Unemployment remains high: Pay settlement rates will fall during 2011 because so many people will be willing to do the same job for less money. Latest figures from the Office of National Statistics show that some 2.5m or 8% of all economically active people remain unemployed as at the end of 2010.

The CIPD expects this figure to reach 2.7m by the end of the year, as newly jobless public sector employees fail to find work in private sector firms. Against this backdrop it is doubtful that employees will feel confident enough to push for substantive pay rises any time soon.

Growth and confidence are expected to decline in 2011: Forecast for UK growth in 2011/12 is being revised downwards. Most recently the respected economic think-tank, the OECD group, trimmed its projections for fourth quarter growth in 2011 from the 2.4% forecast by the Bank of England to 1.3%.

As a result of increased costs and weakening consumer confidence  the Centre for Retail Research anticipates retail sales to fall by 3.1% in the first quarter of 2011. In summary, increasingly pessimistic assessments of the economy in 2011 will help to suppress worker pay demands, as people shift their ambitions from the aspiration of increasing their salaries to the realities of keeping their jobs.

Conclusions

In 2011 a number of different economic factors and variables will compete with one another to influence what happens to people's pay. On the one hand a slow-down in economic growth and rising unemployment will supress workers' pay claims - but on the other hand pent up wage demands and ever rising prices will encourage workers to push for increased wages.

So how will the game play out, and what do we think pay will do over the coming year?

For the economy as a whole we predict median pay settlements to continue to rise for the first part of 2011; initially climbing to around 3% but then settling back to around 2.5% in the third and fourth quarters of 2011 as shown in the graph below.

On balance we feel that as prices continue to rise on essential goods and services, workers will demand higher pay to offset real term losses of income. We feel that people's ability to meet their household  outgoings will marginally outweigh the subduing effects of unemployment and slowing growth.

We expect to see some localised variances to the above trend, with retail wages lagging behind those of the rest of the private sector, but wages in the manufacturing sector rising perhaps as high as 5 or 6%, as skill shortages impact on a rapidly growing sector of the economy. Most public sector employees will see zero or small (<1 %) increases during 2011.

In summary

2011 could be a difficult time for companies who cannot afford to increase wages for their staff. They may well struggle to recruit and retain talent and could see employees become increasingly dissatisfied with their lot.

We've seen a number of new trends emerging in Reward management since the recession;

  • A focus on creating leaner, more focused organisations can bring additional pressure on employees, but a some clients have taken a long, hard look at their relationship with their customer – and started to focus on key decision-making points, undoing blockages and ensuring employees understand accountability within their roles – and conducting organisation design work to embed more direct lines between the customer experience and the decision-maker.
  • Other organisations are taking a fresh look at Job evaluation and considering how a new structure can work better now that the dust has settled on redundancies and re-organisations.
  • Finally, we're getting a lot of calls about re-designing bonus schemes  – and the emphasis seems to be on understanding the metrics that really make the business tick, and rewarding the team for its collective success. Companies are coming out of the recession winter, and wanting to ensure that the 'all in it together' mentality forged during the hard times is enshrined in reward in the future.

If you wish to discuss an issue raised by this article, or a wider Reward issue, please contact Deborah Rees at Innecto Consulting on 020 7268 3664 or alternatively: Deborah@innectogroup.co.uk

 
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