With inflation and the cost of living on the rise, many workers will be looking to their employer for a decent pay increase this year, says Nicola Sullivan

As employers begin to lift pay freezes and reintroduce salary rises for staff, questions are being asked as to whether many are going far enough. According to Gearing up for Growth, the Confederation of British Industry/Harvey Nash Employment Trends Survey published in October 2010, pay freezes had thawed, falling from a peak of 55% of employers in spring 2009 to 14%.

But pay restraint remains the norm as employers try to control costs. In 2011, 22% plan targeted pay rises for key staff, while 42% plan a below-inflation award for all employees. Just one in 10 employers is planning an award in line with, or above, inflation based on the Retail Prices Index (RPI).

Organisations are under more pressure to raise staff pay as inflation rises. Figures from the Office of National Statistics showed that in the year to January 2011, the RPI was 5.1%, up from 4.8% in December. Meanwhile, the Consumer Price Index was 4% in January, up from 3.7% in December.

This year, wages are not expected to keep pace with the cost of living. For example, Aon Hewitt’s 2010/2011 European Salary Increase Survey shows that while UK average salary increases are expected to rise from 2.5% in 2010 to 2.7% in 2011, they will still be below inflation.

Ben Digby, senior policy adviser at the CBI, said: “There is more pressure this year. Employers are aware employees have often gone through two or three years of pay restraint and there will be more pressure on them [when it comes] to pay.

“In the last couple of years, we have seen inflation rising quite high and average earnings have not kept pace. In terms of what our members are thinking when they approach April – when most will be doing their next pay round – I think they are sensitive to the fact inflation is putting more pressure on average earnings but, for them, the most important priority will be the overall health of the business and keeping people in jobs.”

But Richard Exell, senior policy officer at the Trades Union Congress, said there was a business case for higher pay increases. “There is a strong feeling workers were willing to put up with below-inflation pay increases during the worst of the recession out of a spirit of solidarity,” he said. “As we pull out of recession, organisations cannot continue to hold down income levels like that, especially as VAT has gone up. There is a very strong chance mortgages will go up and people will be faced with other costs. This means morale will be affected if wages do not start rising. Employers are facing skills shortages and there is a real possibility of the re-emergence of the poaching of people with valued skills and experience.”

One option for employers is to look at increasing performance-related pay rather than giving a blanket rise to all employees. Another option is to promote other aspects of the reward package aimed at making employees’ salaries go further, such as voluntary benefits.

But John Chilman, group reward and pension director at First Group, said this could prompt a negative reaction from staff. “If I was to go out to our workforce and say ‘don’t forget, you can get discounted this and that’, they would say ‘they are going to fob us off with something because we are not getting a decent pay rise’. What do employers do when someone is in a fairly minimum wage environment? They can be flexible potentially with pensions and let them trade down for a bit, but I am not advocating doing anything a lot different.”

Chilman said a perceived fairness between different groups of staff was also important. “There is an acceptance that although things are turning a corner, they haven’t turned it yet. The thing staff will be looking for is whether the executives’ pay rises are 20% and their pay rises are 2% or 3%.”

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