But the forecast now is that pay will increase by about 3% over the next year. This is the highest increase since January 2009. Most economists expect that wages will continue rising at 3% p.a., slowly moving towards 4.5% by 2017.
Predicted movements in pay levels are only part of the story: affordability for the business is the first consideration with pay increases. The picture remains mixed depending on the fortunes of the sector: for example there are still wage freezes in parts of the manufacturing sector because of tough trading conditions, while rises of up to 7% are being agreed by construction firms.
There may also be specific market rate pressures, for example in skills shortage areas where you have to pay a premium to recruit from outside.
Average salaries shown in recruitment adverts have actually decreased over the past year. There are some indications that companies are channelling resource into salary increases for established middle managers and senior employees, incentivising them to stay rather than recruiting in from outside.
It’s so much better in terms of the psychological contract to award salary increases before and not after a valuable employee finds another job paying a lot more and hands in their notice!
An important principle with salary reviews is whether to award for merit – which will vary between your employees – or whether to give everyone the same rise. Within a budgeted 3% total paybill increase, a practical framework to differentiate could be:
- 5% for high performers and those who have taken on additional responsibility
- 3% for the majority
- 0% for employees in their first 3 months with you, those working their notice and poor performers. You don’t have to give every individual a pay rise - and for poor performers, it can give totally the wrong message!
At the lower end of the market, the increase in National Minimum Wage to £7.20 from next April will create more upward pressure on wages. Make sure there will be a clear step between people recruited on the National Minimum Wage and your experienced people who have learned the job.
Those on longer term career development programmes such as apprentices and trainee accountants need stepped increases planned in so they finish their training at the market rate salary for a fully trained person.
Mandatory Equal Pay audits for those with 250+ employees from next year are likely to extend down to smaller organisations in the medium term. Looking ahead, this would be a good time to analyse the gender pattern of pay in your business, and if there are any significant gaps, start to remedy them with this year’s pay review.