Two-thirds (65%) of HR professionals anticipate an upturn in business over the next twelve months and nearly three-fifths (57%) expect business results to be on or above targeted levels for 2010, according to research from the Hay Group.

However the firm's report Reward 2010 highlighted that 94% of organisations agree that the worst of the recession is not yet over.

Despite this pay and bonuses have improved with nearly four-fifths (79%) of organisations intending to increase salaries over the next 12 months, compared to 57% that increased salaries in 2009. The median increase forecast is 2% - an improvement on predictions of just 1% in March 2009.

There are also signs that the big pay freeze is beginning to thaw. Three-quarters (75%) of organisations that implemented salary freezes in 2009 plan to lift them within the next 12 months. Of those organisations that froze salaries in 2009, 23% are considering a second freeze.

A further positive sign is the re-emergence of performance pay and bonuses. Nearly four-fifths (79%) of organisations are intending to pay bonuses over the next 12 months, half (50%) of which are expected to be on or above target.

Payouts will vary markedly according to industry sector- the majority of FMCG and retail organisations plan to pay full bonuses in 2010, while worst hit sectors, such as financial services and manufacturing, are anticipating below target bonuses.

Despite the overall optimism, the report reveals a divided UK marketplace. While the majority of sectors are cautiously optimistic about 2010 the manufacturing and public sectors continue to face challenging times.

More than two-thirds (69%) of manufacturers expect to fall short of business targets in 2010, while two-fifths (40%) believe it will take between 12 and 18 months to feel the benefits of the upturn – compared to just 20% of all respondents.

Public and not-for-profit organisations are even more pessimistic, with nearly three quarters (71%) not expecting to benefit from the upturn for more than 18 months. Median public sector salary increases are forecast to be just 1% in 2010, in contrast to 2% in April 2009. This is in stark contrast to 2% median increases forecast for the private sector this year.

With substantial cuts in public funding to reduce the Budget deficit expected, certain departments will feel the pressure of cost constraints, in contrast, those with multi-year pay increase deals in place (such as uniformed services) are likely to see those contracts honoured.

In sharp contrast, 90% of retailers and 75% of fast moving consumer goods (FMCG) companies firms expect business performance to reach or surpass target levels this year. Almost all FMCG companies (95%) and a majority of retailers (92%) will provide a salary increase. Nearly three fifths (57%) of FMCG firms that implemented pay freezes in 2009 expect to lift them within the next six months.

Short-term incentives have – and will continue to be – a hot topic for the financial services sector. Rather unsurprisingly, these are forecast to be below target by nearly two thirds (63%) of respondents. Very few (6%) respondents expect above target incentives, as opposed to 13% of organisations across all sectors.

Employee engagement and talent management are seen by HR and reward professionals as the most significant priorities for 2010 – both are cited by almost 70% of respondents as a key challenge.

Claudia Canavesio, reward expert at the Hay Group, said: “With tighter reward budgets, paying and motivating employees, particularly high performers, is a difficult task.It is important for organisations to explore the full breadth of the reward spectrum - offering a competitive total reward package, with a focus on non-financial elements such as career development, work-life balance and job security are likely to maintain engagement and talent.”

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