PAYnotes on different perspectives on pay in 2015

Last week Charlotte reported some of the findings from our most recent UK Reward Management Survey. That survey found, amongst other things, that there was a significantly diminished expectation for pay freezes in 2015. Furthermore, there was a very modest increase in the expected level of pay reviews this year.

Interestingly enough these themes also cropped up elsewhere in the reward news over the past couple of weeks although not, in one respect, supporting the respondents’ views in our survey.

The Bank of England’s perspective

First of all, the Bank of England’s Monetary Policy Committee (MPC) released the February 2015 edition of its quarterly Inflation Report. Whilst this more broadly examines the economy overall, it usually manages to provide some insights into what is happening with employment, labour costs and productivity. Consequently it often gives commentary on wages and pay settlement levels.

The big headline from this Inflation Report was the low level of inflation. The Consumer Price Index (CPI) is just 0.3 per cent at the end of January and is set to continue at that level or lower for some time. Indeed, it may well turn negative in the spring and hover around zero for much of 2015. 

As well as being the lowest level of the CPI 12-month rate since it was first calculated in 1988, this means that, even with modest pay settlement levels, earnings are likely to see a reasonable period of real growth. To put this in context, average earnings excluding bonuses rose by 1.7 per cent for the final quarter of 2014 compared to the same period a year earlier.

Furthermore, a survey undertaken by the Bank’s agents reported that pay settlement levels are likely to be higher in 2015 than they were in 2014. This finding is in line with our own survey which found a modest increase in expectations for 2015 with the average settlement rising from 2.59 per cent to 2.77 per cent. 

An alternative view from the CIPD

The second report that caught my eye was the latest Labour Market Outlook from the Chartered Institute of Personnel and Development (CIPD). It was predicting private sector pay awards in the region of 2 per cent, somewhat lower than our own survey. They also reported that there had been quite high levels of pay freezes in 2014, in more than one third of manufacturing and production companies, for example. Furthermore, almost one in ten organisations were predicting a pay freeze in 2015.

This last finding is particularly at odds with our own survey which found that there were few freezes in 2014 for our participants and even fewer expected in the next 12 months. 

As you can see, the CIPD’s findings generally painted a less rosy picture of pay in 2015. To some extent this is inevitable as their sample incorporates significantly more responses from the public sector where pay continues to be heavily constrained. If the differences in samples are left to one side, there is a general consensus that the movement in pay levels this year will not be hugely different from 2014. Any real pay growth is more likely to be fuelled by extremely low, or indeed negative inflation. 

Additionally, as Charlotte alluded to in her article, there is likely to be a continuing increase in the differentiation of pay awards. Our survey suggests that this will be driven by a desire to target limited spend on high performers. The CIPD warns that this is leading to squeezing of middle level earners.  The highest paid continue to move ahead whilst the lowest paid benefit from increases in National Minimum Wage and, in a few cases, the adoption of the Living Wage.

In the balance

Somewhat ironically, the current extremely low levels of inflation may yet end up having the effect of lessening pressure on pay and thereby continuing to restrain pay settlements. At the same time an overall heating up of the labour market may prove an irresistible force that will eventually feed through into wages. 

It’s in the balance right now. With the majority of pay settlements due to take place in the period up to April it’ll be interesting to see how the rest of 2015 pans out.

By Peter Brown