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Pay award trends in 2009: lowering employees' expectations

As inflation falls and employers look to cut costs, employees may need to lower their expectations in 2009.

An annual review that looks at pay settlement patterns over the past year, as well as the findings of a major survey of private sector employers on pay prospects for 2008-09, aims to help you prepare for your organisation's 2009 pay review.

The pattern of pay awards in 2008:

Pay awards remained fairly stable in 2008 - between January and September the median basic pay award stayed between 3.1% and 3.5%. In October, however, pay awards rose to 3.8%, largely because the National Minimum Wage rose by 3.8% from 1 October and companies with workers paid at the pay floor were obliged to increase their wages to this level. This level of pay was maintained in November 2008 and December 2008.

The clear pattern in 2008 was also that pay awards were running at below the level of retail prices index (RPI) inflation. RPI inflation is one of the key influences on the pay awards of private sector employees, so this was significant in that many employees were receiving pay awards below the rate of increase in prices. This pattern has been evident in figures since May 2006.

However, the pattern reversed in November 2008, when RPI fell to 3%. Pay awards were then worth more than inflation for the first time since May 2006.

Key influences on pay

There are likely to be two key influences on pay awards in 2009: the ability of companies to pay, and inflation. Employees will not be in a strong position on either of these fronts.

We were bombarded with gloomy economic prospects over the autumn, and these are continuing in early 2009. However, back in September when private sector employers were surveyed, they were optimistic that they would be awarding a median 3.5% pay award in 2009. This now seems unlikely - many employees will be happy to settle for job security rather than a pay rise.

The effect of inflation on pay awards

There are two measures of inflation, but, broadly, whichever one employers use as a guide to setting pay, the pattern will be the same. Typically, private sector employers favour the retail prices index, while the government uses the consumer prices index (CPI) measure. The government targets a 2% level of increase on the consumer prices index, and seeks to keep public sector pay awards in line with this target, rather than the actual level of CPI.

Forecasters are predicting that both the RPI and CPI will fall dramatically through 2009, most likely leading to a period of deflation, or falling prices.

As RPI falls, private sector employers will also reduce the level of their pay rise offer to employees, and employees in turn will have to reduce their expectations of pay increases. However, there is a couple of months' lag time between inflation falling, and pay rises following suit.

In the Public Sector, as the Government's aim is to keep pay awards in line with the 2% target for CPI inflation, awards should remain around this level, despite the fact that it is expected to fall to below 2% later in the year. Therefore, some Public Sector workers could see above-inflation pay rises, however, many would prefer to see their pay rises aligned with RPI inflation, and on this measure, they have seen pay awards well below inflation for all of 2008.

Bargaining priorities

For all parties - employers, trade unions and employees - the priority is likely to be saving jobs. But inevitably this will be of paramount importance to trade unions and employees, while employers will have to resort to job cuts if their business is on the line otherwise.

Employers are therefore likely to seek a minimum pay rise in 2009, if they are able to pay one at all. Employees and trade unions will be seeking the maximum pay award possible, as they will always do.

However, this may not be a significant rise this year. A priority for unions will be to balance this with job security. Also, whereas in previous years they may have included changes to various terms and conditions in their pay claims, this year unions are likely to focus on pay alone.

Again, in the current climate of rapidly increasing unemployment, for many employees a job with no pay rise will be better than no job at all.

The likely pattern of awards in 2009

It is expected that the pattern of pay awards being worth more than inflation to continue for much of 2009. However, it is not expected that the current level of pay rises - 3.8% in December 2008 - will be maintained. It is expected that the median basic pay increase will fall during January.

There is some anecdotal evidence of employees being asked to take pay cuts, but as yet, the annual collation of 1,400 pay settlements has yet to record any pay cuts. Over 2008 as a whole, 33 pay freezes were recorded - this number is likely to increase in 2009.

On a more positive note, while the level of pay awards is expected to fall, inflation is expected to fall further. Therefore, pay awards will remain in excess of inflation for much of the year.

The bulk of pay settlements are concluded in January and April each year. It is expected that median basic pay rise will fall to between 2.5% and 3% during this time. Towards the summer, when inflation is expected to fall well into negative territory, most pay awards will already have been settled. But those that do conclude in the second half of the year could see their rise pitched even lower than 2.5%.