Faltering business confidence spells mixed fortunes for pay

09-Feb-2012 - UK companies predict stormy business outlook in 2012; moderate pay increases lag behind inflation.

Faltering business confidence spells mixed fortunes for pay

UK workers face a continuing squeeze on real pay over the next 12 months, as organisations cut costs amid continuing economic uncertainty, according to new research from global management consultancy Hay Group.

The Hay Group report, Reward in 2012, is based on forecast data from reward professionals in over 180 organisations, representing over half a million UK employees.

Pay forecasts for 2012 reflect faltering confidence amongst UK businesses. Two thirds of respondents state that the worst of the recession is not over for their organisation. Almost a third expect to miss performance targets this year.

Organisations are keeping a tight rein on pay increases as a result – leading to concerns over the impact on workforce morale.

However, there is good news for some employees, as the majority of private companies plan to lift the pay freezes implemented during recession.

Business confidence under strain

UK organisations predict a challenging business environment in 2012, according to Hay Group.

Two thirds (66 per cent) of respondents believe that the greatest impact of the recession is still to come for their organisation. Only 7 per cent believe the worst of the crisis is over. By contrast, 61 per cent of firms experienced an upturn in business performance last year.

Almost a third (32 per cent) of firms expect below target performance this year – up from less than 23 per cent in 2011.

Real pay squeeze

As a result of faltering business confidence, close to half (43 per cent) of organisations report pressure to decrease pay in order to control costs.

Despite this, the strong majority (85 per cent) of organisations actually plan to increase pay in 2012 – but at a rate well behind inflation.

Around three quarters (75 per cent) of private sector organisations, and some 90 per cent of public sector organisations, will increase pay – by a median of 2.8 per cent. The Consumer Price Index (CPI) currently stands at 4.2 per cent.

And as inflation continues to erode take-home pay, organisations report a detrimental impact on workforce morale. Over half (51 per cent) of respondents agree that uncertainty around pay has resulted in a downturn in employee engagement.

Adam Burden, Reward Information Consultant at Hay Group comments: “As ongoing instability hits business confidence, a continued squeeze on pay is inevitable. Our research reveals the demoralising effect pay uncertainty is having on employee morale.”

Bonuses rolled back

Falling business confidence is also affecting the prospects for bonus payouts in the coming year.

In 2011, almost three quarters (73 per cent) of organisations with bonus plans forecast payments to be on or above target. This year, the proportion has fallen to 60 per cent.

Pay freezes begin to thaw

Hay Group’s report offers a ray of hope for some workers, however: the lifting of pay freezes in the private sector.

Over a fifth (21 per cent) of private sector organisations implemented freezes in 2011. In 2012, over half (58 per cent) anticipate lifting these.

The outlook is starker in the public sector, where more than two thirds (67 per cent) of organisations froze pay in 2011. Only a third (34 per cent) will lift freezes this year.

Adam Burden comments: “Organisations must take an open and transparent approach to pay to ensure that productivity doesn’t suffer. Engaging employees and communicating reward policy will be key to maintaining motivation during the difficult year ahead.”

Sector focus

Public Sector
2012 will be a year of change for the public sector, according to Hay Group’s report. The vast majority of public organisations (85 per cent) claim that staffing levels will fall due to restructuring this year. The quarters (73 per cent) expect to make redundancies.

Where pay rises will be implemented, they will be restricted to a median of 1.5 per cent –significantly below inflation and lower than the increases expected in the private sector.

Half of organisations believe that cost control will damage their ability to retain key talent, though less than a third (29 per cent) have seen pay freezes affect staff turnover.

Adam Burden comments: “The public sector is facing a tough 2012. Public organisations need to design reward structures that incentivise the individual, drive operational results yet continue to ensure affordability and control.”

Retail
After a tough 2011 on the high street, confidence throughout the retail sector is low.

An overwhelming 79 per cent of retail respondents believe that the impact of the recession is not yet over for their organisation. Almost as many (71 per cent) predict below target performance in 2012.

A third (33 per cent) of retailers plan to implement pay freezes in 2012, with the remainder increasing salaries at a rate below inflation – a median of 2 per cent. This is down on 2011, when all retailers planned to increase salaries and forecasted a median pay rise of 2.5 per cent.

Financial Services
The study reveals a negative shift in business sentiment amongst financial services organisations for 2012.

Just over half (58 per cent) of firms met or exceeded targets in 2011. This year, however, more than half (53 per cent) fear that the worst of the recession is not over for their organisation.

This has had an impact on the outlook for pay in the sector. Whilst all organisations planned to increase salaries in 2011, this drops to 88 per cent for the coming year. Those increasing pay are planning a median increase of 2.5 per cent.

Of those organisations that operate a bonus scheme, almost half (44 per cent) will pay below target.