UK pay rises wiped out by highest inflation in Western Europe

regional-payBritish companies are planning to increase salaries by an average of 3% in 2013 for the second year running according to Towers Watson’s Salary Budget Planning Report for Europe, the Middle East and Africa (EMEA). However with inflation expected to run at 3.2% this year – nearly half a percentage point higher than in 2012 – the real cost of living is likely to rise slightly in the UK, according to the company. The research also shows that 4% of UK companies are planning a pay freeze in 2013 while 3% are preparing to postpone their salary reviews.

In mainland Europe a North-South pay divide is opening up with Northern European countries such as Germany, France, the Netherlands, UK, Belgium and Scandinavia averaging pay rises of 3%, while their Southern European counterparts such as Spain, Greece and Portugal settle on lower increases of between 2% and 2.5%. However, due to lower levels of inflation anticipated for Greece (0.4%) and Portugal (1.8%) and higher inflation in Northern Europe, including the Netherlands (2.7%), Denmark (2.1%) and the UK, the difference in real-terms is likely to be less marked.

Paul Richards, head of Towers Watson’s Data Services Practice in EMEA said: “UK companies are planning to offer similar pay rises to their Northern European neighbours, but with inflation rates remaining stubbornly high in comparison to all other major European economies employees will feel a limited effect, if any. Employees in other European countries such as Germany, France and the Netherlands are going to feel better-off than their British counterparts with lower levels of inflation making pay increases feel more substantial.”

Fast-growing economies
Outside Western Europe, salary increases continue to rise significantly in fast growing and developing economies. In the past year, the Middle East has seen salary increases of 5% in Bahrain, Kuwait, Qatar, the UAE and Oman, while Saudi Arabian and Lebanese companies are anticipating 5.6% and 6.5% respectively. The highest pay rises in EMEA this year are expected to occur in rapidly developing economies such as Turkey (7.5%), Egypt (10%), Russia (9%) and Ukraine (9.2%) according to the research. However, these same markets continue to struggle with high (and often growing) inflation with all expecting 2013 inflation to be at least double that of the UK.

Pay differentiation
Further research from Towers Watson shows the vast majority (93%) of UK companies differentiate pay among employees. Those singled out most often for higher pay rises or bigger bonuses are employees identified as ‘high-performing’ who are rewarded with base pay rises two-thirds higher, on average, than their peers.

Chris Charman, a Director in Towers Watson’s UK Rewards practice, said: “It’s good to see that companies are targeting their resources where they feel they will generate the best return on investment. Interestingly, this tendency to reward selected employees above others becomes increasingly pronounced the more a company’s budget is squeezed. Conversely when budgets were more generous, the focus shifts away from differentiation and toward more equal pay rises across the organisation.”


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