UK companies to maintain 3% salary increases next year

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British companies are planning to maintain this year’s average 3% salary increases in 2014 for the third year running, with the country’s inflation figure expected to remain stubbornly high, according to Towers Watson’s biannual Salary Budget Planning Report. The level of salary increase is broadly in line with other countries in Western European and North America, however the UK’s anticipated 2.7% rise in the cost of living is significantly higher than anywhere else in the region.

Paul Richards, head of Towers Watson’s Data Services Practice in EMEA said: “Signs of a UK economic recovery give private sector organisations the confidence to maintain their 2014 pay budgets above the forecasted inflation rate, at a projected salary increase of around 3%. While Inflation should decrease during the next year the UK prediction is still high compared to countries in the Eurozone, despite similar pay budgets, which should help wage rises on the Continent feel more significant.”

The report provided salary increase budget information for a large selection of economies across Europe, the Middle East & Africa as well as projected inflationary movements for the same period of time. The difference between the UK’s expected wage increases (3%) and inflation (2.7%) – which provides a ‘real value’ income change – was the smallest in Western Europe at just +0.3%. In Germany, France and the Netherlands, where wages are expected to rise by between 2.8-3% next year, inflation is predicted to be at least a percentage point below that at 1.8%. While Italy’s 2.9% planned pay increase and Spain’s 2.5% are significantly higher than the forecast inflation of 0.7% and 0.8% respectively.

The results show that despite often large variations in predicted wage increases, the ‘real’ income improvements were, with a few exceptions, quite similar across the globe, as inflation rates closely tracked pay rises in the major economies. In Western Europe the average difference between expected pay rises and inflation was 1.4%, while in Central and Eastern Europe this increased to 1.8%. The Middle East and North Africa will see average ‘real’ income increases of 1.7% and even the biggest difference, occurring in sub-Saharan Africa, is only 2.2%.

In areas of Central and Eastern Europe such as Bulgaria, Romania and Poland salaries are increasing at a slightly higher rate than in the Western continent at between 4-5%, whereas in Russia and the Ukraine the increases are more substantial at around 9% with inflation predicted to increase in the Ukraine from 1.2% this year to 7.5% in 2014. In the Middle East: the UAE; Qatar; Bahrain; and Saudi Arabia are planning salary increases of just over 5%.

Separate research from Towers Watson has shown that companies are more inclined to offer significantly higher pay rises to high performing employees when overall pay budget are lower.

Chris Charman, a Director in Towers Watson’s UK Rewards practice, said: “When budgets are lower the impact that companies can have on employee’s wage increases is limited, therefore in these instances companies often prefer to distribute a large proportion of their pay budgets amongst their most valued employees in an effort to keep them engaged and motivated. 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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