UK pay rises wiped out by inflation

Jo Faragher

Rising inflation will wipe out any salary increases employers make this year, according to the latest Salary Budget Planning Report for Europe, the Middle East and Africa from consultancy firm Towers Watson.

British companies plan to increase salaries by an average of 3% in 2013, but with inflation expected to sit at around 3.2%, the real cost of living is likely to rise slightly. Towers Watson’s research also shows that 4% of companies plan a pay freeze this year, while 3% will postpone their salary reviews.

The Budget Planning Report also shows a pay divide opening up across Europe: with Northern European countries such as Germany, France, the Netherlands, the UK, Belgium and Scandinavia averaging pay rises of around 3%. Southern European countries (Spain, Greece, Portugal), meanwhile, will offer lower increases of between 2% and 2.5%, but have lower levels of inflation so the difference in real terms will be less visible.

Paul Richards, head of Towers Watson’s Data Services Practice in Europe, the Middle East and Africa (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.”

Recruiters looking for fast-growing economies should head outside western Europe, where salary increases continue to rise significantly. 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 often struggle with high inflation, with all expecting 2013 inflation to be at least double that of the UK.

Back in the UK, Towers Watson research shows that where there are higher pay rises or bigger bonuses, 93% of employers differentiate pay among employees, giving greater rewards to those who are identified as high-performers.