The future of pay

The Bank of England (BoE) have said that an interest rate cut before the end of the year looks less likely following the plunge in the pound and equally higher inflation driven by rising import costs is unlikely to lead to a significant increase in interest rates at this time. The BoE have said that they are setting monetary policy to help sustain growth and employment. 

The pattern for interest rate setting has an impact upon the Consumer Price Index (CPI) which in turn is a key indicator, used by many employers these days in considering annual pay awards. CPI rose by 0.9% in the year to October 2016, compared with a 1% rise in the year to September. The rate in September 2016 was the highest since November 2014. The majority of economists will caveat their forecast for CPI over a longer period as there are too many variables to accurately predict, but most of the evidence points towards no material increases in CPI over the coming years. Research shows predictions from various commentators of between 1-3% between now and 2020. This could in turn reflect fairly modest annual pay/cost of living awards over the next few years.

The CIPD’s Labour Market Outlook autumn report, indicates that short-term employment growth will remain strong, suggesting the labour market remains resilient following the vote to leave the EU.The report shows that employers are expecting to award average pay rises of just 1.7 per cent this year, which suggests government-imposed increases in labour costs such as the national living wage (NLW) and the apprenticeship levy are weighing on balance sheets. The survey of more than 1,000 employers – covering the 12 months from March 2016 to March 2017 – found that around a third expected the NLW to raise average salaries by 2 per cent and just over a fifth said that the NLW would be a factor in weaker pay awards.

Pay rise expectations are slightly higher in SMEs and the private sector (2 per cent), but the outlook for larger organisations and the voluntary and public sectors averages just 1 per cent.

Research suggests that the apprenticeship levy, auto-enrolment and increases to the NLW will continue to impact on the likelihood of employers raising pay across the broader employee base. By some measures, pay growth will remain sluggish until the end of the decade. However there is some variation across sectors. Pay expectations are higher in manufacturing and production and services at 2%, than in the public sector and voluntary sector at 1%. At the same time, nearly a fifth plan to freeze pay.

Discussions amongst Housing Association Board Members, it is reported, has been on making a modest pay rise, and during the forthcoming budget setting process it will be interesting to see if the predictions match up to the reality. Feedback so far has reflected that the most typical pay award is unlikely to exceed 1.5%.

This situation again highlights the need for employers to focus on workplace productivity improvements in order to be able to afford sustainable, above inflation, pay increases and on creative ways of using available funds to create a reward package which remains attractive in recruiting talent, in what continues to be a competitive market place.

Gerri Green is the HR Project Manager at Campbell Tickell. For more information or to discuss this article, please contact: gerri@campbelltickell.com