XpertHR survey of pay prospects 2015: pay rises not forecast to increase

Transcription

1 2014 survey findings from XpertHR survey of pay prospects 2015: pay rises not forecast to increase This report is supplied free of charge to a participant in XpertHR research to thank them for taking part in the study. The report includes: The full article as it appears on XpertHR Copyright in this document is the property of the publishers. If you make clear the source of the information, you may use it freely within your organisation. Under no circumstances may you republish it, share it with other organisations, use it in consultancy services, or use it without attributing XpertHR as the source. If you are in doubt, please contact Sheila Attwood at sheila.attwood@xperthr.co.uk.

2 XpertHR survey of pay prospects 2015: pay rises not forecast to increase Author: Sheila Attwood Employers are forecasting that 2015 pay settlements will remain at the same level as those awarded during 2014, delivering a blow to those who had hoped that the six-year period of low pay awards would ease in the coming 12 months. Annual review of pay trends 2014 This article forms part of the XpertHR annual review of pay trends and survey of pay prospects for The series includes a review of pay settlement trends over the past year, as well as an analysis of the likely pattern of pay awards over the coming year. Read all of the articles in our annual review of pay trends series (subscription required): Basic pay awards. Performance-related pay awards. Private-sector pay. Pay bargaining calendar. XpertHR's review of pay settlement trends over the year to the end of August 2014 revealed that pay rises remained muted for yet another year. Across the economy as a whole, we recorded a median 2% increase in pay over the past year, unchanged on the level recorded for the previous year. This figure was below the 2.5% increase that respondents to our 2014 pay prospects survey had predicted, and below the 2.4% retail prices index (RPI) inflation figure for the same period. However, on a more positive note, we have seen fewer awards result in a pay freeze. Over the year to 31 August 2013, 13.1% of all pay reviews resulted in a pay freeze. By the year to the end of August 2014, this figure had fallen to 10.1%. This article examines the likely level of pay awards in 2015, including the possible number of pay freezes, and the factors that will influence the outcome of pay reviews. It is based on a survey of 282 organisations operating in the private sector. These respondents were able to supply information on pay forecasts for all groups of employees at their organisation whose pay awards are negotiated or decided separately, resulting in information on 419 employee groups being provided. Our research does not cover the public sector as it is currently covered by the Government's policy of average pay awards up to 1%. Pay awards in 2015 likely to be same as 2014 Our review of private-sector pay awards effective in the year to the end of August 2014 revealed that around one-third were worth more than the same group of employees received in the previous year, the same proportion were lower and the remaining third were worth the same in each year. A slightly different pattern of pay awards is expected over the next year (see chart 1). The majority (around six in 10) of respondents expect their 2014/15 pay settlement to be worth the same as it was in 2013/14. Encouragingly, only one award in six is expected to be worth less, although only one in four are forecast to be at a higher level. There is little variation from these figures when the private sector is broken down into its two key subsectors. For example, only slightly more manufacturing-and-production firms (28%) are predicting a higher pay rise over the next year than private-sector-services organisations (23.1%). XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 2

3 Chart 1: Private-sector pay settlement outcomes for 2013/14, and expectations for 2014/ employee groups employee groups. Most pay reviews will deliver an increase For the most part, pay reviews effective between 1 September 2013 and 31 August 2014 delivered a pay rise for employees - just 10.1% of pay reviews in the private sector resulted in a pay freeze, although some variation by subsector was noted. For example, construction and finance organisations did not include any pay freezes over the past year, while around one-third of settlements in paper and printing firms resulted in a freeze. A slightly more positive picture is forecast for the year to the end of August Just 6.7% of employee groups are forecast to receive a pay freeze during this period, marking the lowest proportion of pay freezes since before the recession. The majority (81%) of employee groups are expected to be awarded a pay rise at their next review. Additionally, a handful of employees will not be subject to a pay review over the next year, while the outcome for around one in 10 employee groups is unclear at this stage. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 3

4 Predicted pay settlements for 2014/15 Our survey has yielded information on the predicted pay awards of 419 separate groups of employees across 282 organisations in the private sector. Over the year to 31 August 2015 these employers are predicting a 2% median basic pay award. This matches the median pay award made in the year to 31 August 2014, but is below the 2.5% award that had originally been forecast for the past year. Further findings include the following: When arranged by value, a quarter of pay awards (marking the lower quartile) are expected to be worth 2% or less. The top quarter of pay awards are forecast at 3% or more. The interquartile range - marking the middle 50% of pay awards by value - therefore spans a narrow one percentage point. The most common pay rises predicted for the year ahead are 2% (cited in relation to 31.5% of employee groups) and 3% (expected for 21.5% of groups) (see chart 2). Three pay awards in 10 (29.1%) are forecast to be worth 3% or more - which would match or exceed the 3% RPI inflation figure predicted for By broad industrial sector, manufacturing-and-production firms are more optimistic, forecasting a 2.5% pay award over the next year, compared with a 2% prediction from those operating in private-sector services. However, employers in both sectors expect half of all pay awards to fall between 2% and 3% (the interquartile range). Chart 2: Pay awards forecasts, 12 months to the end of August 2015 n = pay forecasts for 419 employee groups. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 4

5 Pay forecasts by industry Table 1 provides a breakdown of pay forecasts for the year to 31 August 2015 by 14 component industries of the private sector. Our results again demonstrate not only the muted level of pay bargaining predicted over the coming year, but also the limited range of pay awards that are expected. The engineering and metals sector stands out at the top of the range, predicting a 3% median pay award over the coming year. This is followed by electricity, gas and water employers, predicting a 2.8% rise in a sector that already recorded the highest median pay award over the past year. Sitting at the same level as the sample as a whole are the construction, finance, not-forprofit, professional and business services, and transport and storage sectors. Few outlying pay awards are predicted, with half of all pay awards in each sector expected to fall within one percentage point of the median value. Determining the 2015 pay award The recession has had a noticeable impact on the level of pay settlements over the past six years, with an almost immediate drop in the value of pay awards as the economy faltered in early While inflation was the key determinant of the level of pay awards in the prerecession years, for many organisations loss of revenue in 2009 and 2010 necessitated a much reduced pay award, which in many cases ended up as nil. The economy has since picked up, but many organisations are yet to feel confident enough to greatly increase the level of their pay award to employees. Indeed, business performance is going to be a key factor for pay awards over the coming year. Benchmarking XpertHR's benchmarking service has the full data on organisations' pay awards over the past year and pay forecasts for The organisations responding to our survey were asked to identify the key factors that will be taken into account when setting the level of their next pay award. The most common are: Company performance/ability to pay - almost all (95.4%) organisations said that their own performance would have a bearing on the level of pay rise. Benchmarking against other organisations - nearly eight organisations in 10 (78.4%) expect to look at the pay rates of other organisations operating in the same industry when considering the level of pay award. Inflation/cost of living - XpertHR's median basic pay award has been worth less than RPI inflation since the end of 2009, and although 70.2% of organisations will look at inflation levels when setting their pay award, the current pay forecast of 2% indicates that pay awards will continue to fall behind increases in the cost of living. Recruitment and retention - the labour market has remained relatively strong throughout the recession, but, as the economy continues to improve, companies can expect to experience competition for the best employees. Almost seven organisations in 10 (68.4%) report that employee retention will influence the pay award, while a similar proportion (63.8%) will be keeping an eye on their ability to recruit. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 5

6 Conflicting pressures on pay awards Each of the above factors could have either an upward or downward influence on future pay award levels, depending on the individual organisation's circumstances. Overall, 97.9% of respondent organisations reported upward pressures on their next pay award, compared with 70.2% citing at least one factor that would serve as a downward pull (see table 2). The key factors that respondents say will exert an upward pressure on pay awards are: pay levels in the same industry (cited by 65.2% of respondents); employee retention (63.5%); company performance/ability to pay (62.8%); employee recruitment (57.4%); and inflation/cost of living (52.5%). Conversely, the key downward pressures will be: company performance/ability to pay (32.6%); ability/inability to raise prices of products/services (28%); pension costs due to pensions auto-enrolment (23.8%); pension costs generally (20.9%); and inflation/cost of living (17.7%). Chart 3 shows the balance of influence for each factor - calculated by taking the proportion of respondents citing each factor as an upward influence from those reporting it as a downward influence. The most notable finding is that there are twice as many upward influences expected, with just six factors predicted to be downward pressures on pay award levels. Most notable of these, however, is expected to come from pension costs - both as a result of the introduction of pensions auto-enrolment and costs more generally. In terms of upwards influences on pay awards, there is a definite emphasis on labour market competitiveness: Setting pay awards at a level that ensures employee retention is predicted to be the largest upward influence on settlement levels. A desire to keep up with the market will see organisations checking pay levels against organisations operating in the same industry. As the economy improves, employers will be keeping an eye on their ability to attract new recruits by offering competitive reward. As we discuss later, many organisations are also addressing labour market pressures through additional salary increases outside of the annual pay review. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 6

7 Chart 3: Balance of pay pressures 2014/15 n = 282 organisations. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 7

8 When will pay rises be worth more than inflation? The answer to this question lies not only in the level of pay awards, but also with the measure of inflation that they are compared against. There are several different measures of inflation, but for the purposes of pay bargaining, RPI remains, just, the most commonly used measure: 70.4% of organisations that refer to a measure, or measures, of inflation when setting pay award levels refer to RPI. 68.4% will look to consumer prices index (CPI) inflation. 43.4% of organisations will look at both RPI and CPI measures of inflation. Other measures of inflation are used by only a handful of organisations, including RPIJ (6.6%), RPIX (5.6%) and CPIH (1.5%). RPI inflation currently stands at 2.3% (September 2014), with CPI at 1.2%. Pay awards, at 2%, sit below the RPI inflation figure, but above that for CPI. RPI is forecast to stand at 3% over 2015 as a whole - putting our 2% pay forecast for the year to August 2015 firmly below this measure of inflation. Although inflation is a factor that many organisations take into account when setting the level of their pay award, just 5.4% reported that their pay settlement is explicitly linked to inflation levels. Increases to salaries outside of the annual pay review More often than not, the annual salary review applies the same percentage increase to all employees in an organisation. It does not address anomalies in salary levels or provide additional increases for selected individuals. Among our survey respondents, almost two-thirds (63.1%) reported that they would make some additional increases to salaries for at least some individuals outside of the annual review process. By far the most common reason for such modifications is employee retention, mentioned by 34.3% of organisations. This is followed by those making market-rate adjustments (22.1%) and payments in recognition of taking on additional duties (18%). Recruitment (14%) is also mentioned quite frequently. Most employers reported that these measures were being taken in respect of particular employees or to address specific skills shortages. Nearly two-fifths (37.9%) of organisations are planning other changes to terms and conditions of employees over the coming year. These cover all elements of the reward package, but pensions - specifically auto-enrolment - and changes to grading structures were cited most frequently. Total reward offering Since the level of pay rises plummeted at the beginning of 2009, employers have often looked to the other elements of the reward package to ensure that their offering remains competitive and engages staff (see table 3). This year, our survey revealed a number of cost-effective approaches to offering a wider range of benefits to employees: 71.6% of respondents reported using salary-sacrifice arrangements, while only 10.3% operate a full flexible benefits scheme; voluntary benefits schemes are available in 39.7% of organisations; an employee recognition scheme is in place in 46.1% of respondent organisations; and 71.6% of organisations link pay in some way to individual employees' performance. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 8

9 Our research This report is based on original research carried out online in August and September Responses were received from 282 private-sector organisations, employing a total of more than 796,000 people. The breakdown by industry is as follows: 214 (75.9%) are in private-sector services; and 68 (24.1%) are in manufacturing and production. Broken down by workforce size, the respondent organisations comprise: 128 (45.4%) employing between one and 249 employees; 82 (29.1%) employing between 250 and 999; and 72 (25.5%) employing 1,000 or more. Table 1: Pay award forecasts by industrial sector, 2014/15 Industry sector Lower quartile, % Median, % Upper quartile, % n = Chemicals, pharmaceuticals and oil Construction Electricity, gas and water Engineering and metals Finance Food, drink and tobacco General manufacturing Hotels, catering and leisure Information and communication Not-for-profit Paper and printing Professional and business services Retail and wholesale Transport and storage Total (private sector) Industry sector samples that were too small to produce figures are not included. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 9

10 Table 2: Predicted upward and downward pressures on the 2014/15 pay round BUSINESS/ECONOMIC Factor Upward Downward Company performance/ability to pay Inflation/cost of living Employee productivity Ability/inability to rise prices of products/services Pension costs - due to the introduction of pensions auto-enrolment Pension costs - generally Public-sector pay levels Government policy on public-sector pay COMPARABILITY Factor Upward Downward Pay levels in the same industry Pay relativities within an organisation Pay levels in the same occupational group Pay levels in the same locality National "going rate" of pay settlements The living wage LABOUR MARKET Factor Upward Downward Retention factors Recruitment factors Changes in the national minimum wage Risk of redundancy n = 282 organisations. XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 10

11 Table 3: Reward practices used Reward practice % of employers currently using reward practice % of employers planning to introduce reward practice over the next Salary sacrifice Merit or individual performance pay Cash bonus Market-linked pay Employee recognition scheme Voluntary benefits scheme Skills-based pay Incentive payments Competency-based pay Regional pay Commitment to pay the living wage Broadbanding Employee share scheme Total reward statements Company profit-sharing scheme Flexible benefits scheme n = 282 organisations. Reed Business Information XpertHR XpertHR survey of pay prospects 2015: pay rises not forecast to increase 11