Forecasts for pay awards in 2018/2019
Author: Sheila Attwood
In 2018 we saw the longest sustained increase in pay awards since 2008, with higher awards particularly noticeable in the manufacturing-and-production and public sectors. We now look ahead to 2019 to assess whether or not the current pay award levels will be maintained.
The past year finally brought some good news on the pay front: in the public sector the lifting of the pay cap saw the highest rises we've seen since 2009, while private-sector employers awarded a median 2.5% rise over the past year (up from 2% for the best part of seven years).
Almost all composite industries of the private sector saw higher pay rises over the past year compared with the previous one. Among the most notable findings was that pay awards in the electricity, gas and water sector rose from a median 2% to 3%, and the not-for-profit sector finally moved up from a 1.5% median pay award to 2%. See our review of private-sector pay for full details of pay awards by industry over the past year.
Pay setting has been conducted against slow but strengthening economic growth (UK GDP rose from 0.1% in the first quarter 2018 to 0.4% in the second quarter). Yet higher growth is in part constrained by weak consumer spending in the face of low wage growth and high inflation, and forecasters are predicting lower GDP growth over the coming year (although the weak sterling is helping those with a strong export business). In addition, the backdrop of ongoing Brexit negotiations has left a degree of uncertainty.
The coming year is a strike into the unknown for many employers - just how Brexit will affect the economy, the labour market and trade is impossible to predict. However, many employers will have conducted their next pay review before the 29 March deadline for the UK leaving the EU, and this is not the only factor that employers will take into account when setting their pay reviews for 2019. Our latest pay forecasts survey looks at what 312 private-sector organisations have in store on the pay front for their employees over the next year - defined as the period running from 1 September 2018 to 31 August 2019. Employers tell us what factors are going to influence their next pay review and share how much they think these pay reviews are going to be worth. We do not include public-sector organisations in our sample due to the central nature of pay setting here, and the fact that many individual organisations are not able to influence the outcome of any pay reviews.
Annual review of pay awards 2018
This resource forms part of the XpertHR annual review of pay awards for 2018. In this series, we examine the pattern of pay awards over the past year and provide an analysis of the trends identified.
Other resources in the series include:
Stable picture of pay rises
The past year has been characterised by a noticeable uplift in pay awards to their highest level since before the 2008/2009 downturn. Among the private-sector pay awards collated by XpertHR over the past year, a clear majority (59.1%) were higher than the same group of employees received at the previous review.
Over the coming year, however, employers do not expect pay rises to go any higher. We asked respondents to tell us about the pay reviews for all employees in their organisation - where these might vary according to different groups of staff, they could give details for their two largest employee groups. As Chart 1 shows, the majority (61.2%) of employee groups are being predicted a pay rise that will be worth the same amount as the one received over the past year. Just 21.5% are forecast to receive a higher rise, suggesting that the headline pay award for the coming year will not stray far from the 2.5% median recorded by XpertHR over the past year.
Optimism does vary a little between the sectors. In the manufacturing-and-production sector, slightly more (23.9%) employee groups are expected to receive a lower award than across the sample as a whole. Lower awards are less likely for employees in private-sector-services firms (14.8%), as they are instead more likely to receive the same pay rise as last year (63.6%).
By organisation size, workers in the smallest organisations (with fewer than 250 employees) are slightly more likely to be in line for a lower pay award over the next year (19.4%), while those in organisations with between 250 and 999 staff are the most likely to receive a higher increase (23.7%).
Chart 1: Private-sector pay settlement expectations for 2018/2019
1. n = 441 employee groups.
2. n = 723 employee groups.
Majority of employers planning a pay rise
Broadly speaking, employees working for the firms responding to our survey can expect a pay rise over the coming year, with almost eight in 10 (79.8%) employee groups expected to be given a pay rise at the next review. Among the remainder, just 5% are facing a pay freeze and the majority of the others have yet to decide whether or not an increase can be awarded.
A broadly similar picture emerges by sector, although a higher proportion of private-sector-services companies are still undecided (14.5%), and slightly more employee groups in manufacturing-and-production firms (84.6%) are predicted to receive a pay rise for the next year. By organisation size, the smallest employers are least optimistic, with 9.7% of employee groups in these firms forecast a pay freeze, compared with 0.8% of groups in organisations with 1,000 or more employees.
Pay rise forecasts for 2019
Private-sector employers are predicting a median 2.4% pay award over the year to the end of August 2019. This is just below the median 2.5% pay award recorded over the past year, but suggests some optimism that we are not going to return to the 2% pay awards that we have seen over recent years.
Full analysis of the sample of pay forecasts for 356 employee groups reveals the following:
- Median down slightly. The median pay forecast from private-sector employers for the coming year is 2.4%, slightly down on the 2.5% median pay award recorded over the past year.
- Interquartile range of one percentage point. Excluding the top and bottom 25% of pay awards gives us an indication of the likely spread of pay awards around the median. In line with the picture seen throughout 2018, employers predict that a quarter of deals will be worth 2% or less, while a quarter will be at or above 3%.
- Most common award expected to be 2%. Against a median 2.4% predicted pay award, the most common increase is forecast to be 2%, expected to be awarded to 33.1% of employee groups. This is followed by 3% (forecast for 18% groups) and 2.5% (15.2%).
- Manufacturing-and-production awards higher. Employers in the manufacturing-and-production sector are predicting a median 2.5% pay award over the coming year, slightly higher than across the private sector as a whole. The middle half of pay awards is expected to fall between 2% and 3%, while the most common pay awards are forecast to be 2% (expected for 30% of employees groups) and 3% (27%).
- Slower wage growth in private-sector services. Employers in the services arm are expecting slower wage growth than elsewhere in the private sector, with the median forecast pay award at just 2%, although half of the predictions fall between 2% and 3% in line with elsewhere in the sector. More than one-third (34.4%) of pay awards are forecast to be at exactly 2%, with 14.5% at 3%. However, the number of organisations planning a pay rise of 4% or more in this sector is notable - 10.9% have made this prediction, with the bulk of these operating in the retail, not-for-profit, and professional and business services sectors.
Chart 2: Pay award forecasts, 12 months to the end of August 2019
n = 356 employee groups.
Pay forecasts by industry
Further breakdowns of our pay forecasts by industrial sector show some variation from the 2.4% prediction for the private sector as a whole (see table 1). At the top end, firms in the engineering and metals, and information and communications sectors are expecting a median 3% pay award over the next year. No sectors are predicting a median award of less than 2%, although several are at this level, which for some would represent a fall on the figure recorded over the past year.
Full details of the range of forecast pay awards by industry can be found on XpertHR Benchmarking.
Table 1: Pay award forecasts by industry sector
|Industry sector||Lower quartile, %||Median, %||Upper quartile, %||n =|
This table sets out the forecast pay awards for the 12 months ending 31 August 2019.
Industry sector samples too small to produce figures are not included in the table but are included in the total figures.
|Chemicals, pharmaceuticals and oil||2.0||2.5||3.0||11|
|Electricity, gas and water||2.0||2.7||3.0||12|
|Engineering and metals||2.5||3.0||3.0||17|
|Food, drink and tobacco||2.0||
|Hotels, catering and leisure||2.0||2.0||2.7||19|
|Information and communication||2.0||3.0||3.0||33|
|Professional and business services||2.0||2.0||3.0||64|
|Retail and wholesale||2.0||2.5||3.0||35|
|Transport and storage||2.0||2.0||3.0||22|
|Total (private sector)||2.0||2.4||3.0||356|
Factors shaping next year's pay awards
The exact level of each organisation's pay award over the next year will be determined by the consideration of a host of factors. These will vary from organisation to organisation, but there is a clear consensus that the labour market will play a key role in shaping next year's pay awards. Retention difficulties, skills shortages and competition for labour are expected to put pressure on organisations to keep pay levels in line with their competitors, whereas increased pension costs and an unclear economic future due to Brexit will prevent some organisations from giving the increases their employees would like to see. All the above factors also come with the caveat that organisations can pay only what they can afford.
Upwards and downwards pressures on pay awards
We asked our survey respondents to indicate which of a host of factors were likely to push pay award levels up or down. The full results are given in table 2, showing that key upwards pressures will be:
- pay levels in the same industry (78.2% of respondents);
- inflation/cost of living (77.9%);
- retention factors (71.8%); and
- recruitment factors (67.6%).
The factors expected to pull pay award levels down are:
- the organisation's performance/ability to pay (32.7%);
- the ability/inability to raise prices of products/services (26.9%);
- pensions costs - due to pensions auto-enrolment (25.3%); and
- uncertainty due to Brexit (23.4%).
Table 2: Predicted upward and downward pressures on the 2018/2019 pay round
n = 312 organisations.
|Factor||Upward pressure, %||Downward pressure, %|
|Inflation/cost of living||77.9||6.1|
|Company performance/ability to pay||55.8||32.7|
|Ability/inability to raise prices of products/services||18.6||26.9|
|Trade union pressure||17.9||1.0|
|Public-sector pay levels||14.1||3.5|
|Uncertainty due to Brexit||11.2||23.4|
|Government policy on public-sector pay||10.9||3.2|
|Movements in the exchange rate||10.3||9.6|
|Pensions costs - generally||9.3||21.2|
|Pensions costs - due to pensions auto-enrolment||8.7||25.3|
|Factor||Upward pressure, %||Downward pressure, %|
|Pay levels in the same industry||78.2||5.4|
|Pay levels in the same locality||61.5||8.0|
|Pay levels in the same occupational group||54.5||4.5|
|Pay relativities within your organisation||53.8||6.1|
|National "going rate" of pay settlements||50.3||6.7|
|Differences in pay levels between men and women||32.1||3.5|
|Factor||Upward pressure, %||Downward pressure, %|
|The level of the compulsory national living wage||32.1||2.6|
|The national minimum wage||31.7||3.2|
|The voluntary living wage for the UK or London supported by the Living Wage Foundation||24.4||2.6|
The labour market continues to dominate the factors that are providing an upward influence on organisations' pay awards. High inflation - retail prices index (RPI) inflation stood at 3.3 % in September 2018 - is also putting pressure on employers to offer a real terms pay rise. This year, we added in the factor "uncertainty due to Brexit", and this emerged as one of the key downward pressures on pay.
With the vast array of organisations in our sample, factors that are expected to produce an upward pressure for one won't necessarily be the same for another. Therefore another way of looking at the data is to see, on balance, what impact each of the factors we examine will have on pay awards. We do this by subtracting the proportion of respondent organisations who cite each factor as a downward influence from those who consider it an upward influence (see chart 3). On this basis, the key upwards influences remain those associated with the labour market, while pensions costs and Brexit are most likely to put a brake on pay award levels.
For information on how Brexit is expected to impact on different sectors of the economy, and the pay reviews made by organisations, see the 12 sector pay reviews in Review of pay awards 2018: Private-sector pay.
Chart 3: Balance of pay pressures 2018/2019
n = 312 organisations.
Using inflation in pay setting
In the years preceding the 2008/2009 recession, inflation (and more specifically RPI inflation) provided a guide to employers on the level of pay rise to award their employees - typically employers sought to match the increase in prices. More recently, our research has shown that although employers do still look at inflation when reviewing pay, it is just one of a number of factors that will be taken into account.
There are also now several measures of inflation for employers to choose from. RPI continues to be the measure of choice for employees and their representatives, due to the inclusion of owner-occupied housing costs in its calculation. Consumer prices index (CPI) is the measure targeted by the Government, while CPIH (which includes not only a measure of housing costs, but also rentals) is favoured by the Office for National Statistics. The use of CPIH has not gained traction from a pay-setting perspective - just 9.3% of our survey respondents refer to it when setting pay awards.
For the past six years we have been following which measure of inflation employers favour when it comes to pay setting, and have seen a gradual move from RPI to CPI. In our latest analysis, we find that 51% of organisations will refer to CPI when conducting their next pay review, and 48.7% to RPI (there is a degree of overlap here, with many respondents selecting both measures).
However, the use of inflation in pay setting is largely limited to considering it, along with several other factors. XpertHR Benchmarking has details of exactly how a selection of organisations use inflation in their pay review process: few mention an explicit link. During our collection of pay awards throughout the year, we note whether or not there is a specified link to inflation - examples among our sample of pay awards over the past year include the following:
- The final year of a three-year pay deal at a utility company, which gave a 3.58% basic pay rise from 1 January 2018, based on the average RPI figure recorded for each month between January and December 2017.
- The first year of a three-year deal at an engineering company, which gave a 3.7% from 1 January 2018. This will be followed by a rise for 2019 equivalent to RPI (subject to a minimum of 1.5% and a maximum of 4%); and for 2020, a rise equivalent to RPI plus 0.25% (subject to a minimum of 1.5% and a maximum of 4%).
- A January 2018 deal at a facilities company, in which the second year of a two-year deal awarded a 4.35% increase based on the December 2017 RPI (4.1%) plus 0.25%.
Salary levels and wider terms and conditions
For many organisations, the focus on pay levels does not end with the annual pay review, with most also looking at salaries throughout the year. We asked whether or not additional increases would be made due to any of nine different factors, and 94.2% of respondents reported that they would. Key findings include that:
- eight in 10 (80.8%) organisations will be making salary changes due to promotions during the year;
- while 64.1% reported that salary changes would be made to address internal salary anomalies, only 16.7% expect changes will be made as a direct result of their gender pay gap reporting; and
- pressure from the labour market is expected to continue to be felt, with changes resulting from market rates (61.2%), retention problems (66%) and recruitment issues (58%) all commonplace.
Other changes to employees' terms and conditions are also anticipated by 23.7% of respondents. One of the most significant and frequently mentioned is the increase in employer's pension contributions under the pensions auto-enrolment regime (which increase from 2% to 3% from 6 April 2019). Benefits packages are also likely to come under scrutiny, with some organisations conducting an overarching review of their offering, while others are focusing on specific benefits. Sickness benefits were cited several times, with two organisations saying that the benefit is likely to be reduced. A more detailed list of the changes that employers are planning can be found on XpertHR Benchmarking.
There is much more to the overall reward package than just salaries, and most organisations in our survey use other practices to boost the overall offering to employees (see table 3). Most notably, two-thirds of employers take advantage of salary-sacrifice arrangements, allowing employees to sacrifice a proportion of their salary in return for a non-cash benefit. More than four organisations in 10 offer bonuses to at least some employees.
Table 3: Reward practices used
|Reward strategy||% of respondents currently using|
n = 312 organisations.
|Merit or individual performance pay||57.7|
|Employee recognition scheme||41.3|
|Voluntary benefits scheme (external discounts)||37.7|
|Total reward statements||21.3|
|Full flexible benefits scheme (buy and sell benefits)||16.7|
|Employee share scheme(s)||12.8|
|Company profit-sharing scheme||8.2|
This report is based on original research carried out online in August and September 2018. Responses were received from 312 private-sector organisations, employing almost 1.2 million people. The breakdown by industry is as follows:
- 233 (74.7%) are in private-sector services; and
- 79 (25.3%) are in manufacturing and production.
Broken down by workforce size, the respondent organisations comprise:
- 146 (46.8%) employing between one and 249 employees;
- 85 (27.2%) employing between 250 and 999; and
- 81 (26%) employing 1,000 or more.
What should I do now?
- Bookmark the Pay and benefits topic page to ensure that you keep up to date with all the latest reward content on XpertHR.
- Get up to date on the trends in pay settlements over the past year by reading our Review of pay awards 2018: Basic pay awards.
- Visit XpertHR Benchmarking to see the full data on pay awards in the 12 months to the end of August 2018 and expected pay awards in 2019.
- Read Pay trends October 2018: Median basic pay award unchanged to find out what pay awards have been awarded in the most recent three-month period.
- Look at Pay awards by industry to understand what is happening with pay awards in your sector.