Inflation hits pay settlements as global downturn looms

In pay terms, 2007-8 can be characterised as one rule for the private sector, another for the public. In a year when the government aggressively capped public sector pay, negotiators in the private sector have achieved almost 45% more than public sector deals: a contrast of 4% at the midpoint against only 2.75%. Furthermore, the top quartile of workers in the private sector this year exceeded 6%.

Labour Research Department’s annual survey of pay settlements, based on our Payline database, shows that negotiators have responded to the rising cost of living – where they could – not only with a higher basic pay settlement level, but by pursuing wider deals in terms and conditions including pay arrangements (incentives, bonuses, progression, premia), working time adjustments and time off for working parents. The 2007-8 pay round also reveals a wider trend of unions both in the civil service and in parts of the private sector bargaining to overcome the effects of fragmentation by pushing for parity across their industry or group or seeking other “fairness” arrangements including underpinning payments and pay harmonisation to get better deals for their members. As in previous years, those with long-term inflation-linked pay deals in general fared best.

The impact of inflation

In 2007-8, Retail Price Index (RPI) inflation, on the rise since 2006, has been lodged firmly in the 4%-plus range, compared with an average of 3% or less during each of the preceding seven years. It has been caught up and overtaken by the RPI excluding mortgage interest rates (RPIX) – now over 5%. Even the once-tame Consumer Prices Index (CPI), which remained below the 2% mark until 2005, has been running this year at an average of 3.3%, climbing to 4.7% in August and 5.2% in September.

Inflation forecasts are influential. Negotiators’ expectations about the cost of living are an important factor when it comes to pay bargaining. At the start of 2008, forecasts for fourth-quarter inflation averaged just 2.6% (RPI), 2.9 (RPIX) and 2.2% (CPI) (Forecasts for the UK Economy, compiled by HM Treasury). But during the spring and early summer they rose spectacularly, with latest forecasts averaging 4.8% (RPI), 5.0% (RPIX) and 4.4% (CPI) for the fourth quarter of 2008.

Despite inflationary pressure and private sector trends, average earnings overall have remained relatively subdued, with the whole-economy figure ending the 2007-08 pay round at 3.8%, reflecting the dampening impact of public sector pay. But a closer look at pay settlement levels (as measured by the mid-point or median on LRD’s Payline database) reveals a marked response to rising inflation. Mid-point levels of between 3 and 3.3% going back as far as 1999 gave way in the 2006-07 pay round to 3.6%, and Payline shows that in the latest pay round that jumped to 3.9% (see below).

Pay bargaining may seem a less immediate concern to many negotiators at presentthan job security. However, before the recent economic turmoil set in, the 2007-08 pay round saw only a modest rise in UK unemployment, from 1.6m to 1.7m in the year to May-July 2008 (across the 16-59/64 age range). While vacancies fell from 662,800 to 599,400 (over the year to August) the Jobseekers’ Allowance “claimant count” went from 848,600 to 904,900 (redundancies rose from 120,000 to 138,000 in the year to May-July 2008). This picture has clearly worsened considerably since the pay round ended in July: the Hay Group and the Centre for Economic and Business Research predicted a 1.9% workforce loss from the finance sector – a total of 110,000 jobs. The CBI, the employers’ organisation, has warned of implications for the “real economy” while the British Chambers of Commerce say the UK is already in recession.

Times may be getting tough, but there were few pay freezes during the last pay round. David Yeandle, head of employment policy at EEF, the manufacturing employers’ organisation, predicted earlier this year that higher settlements would be balanced by more pay freezes and deferred pay rises. The TUC believes that this is unlikely to be the case and during the 2007-08 pay round LRD recorded just half-a-dozen such deals.

TUC senior policy officer, Richard Exell, told Workplace Report: “During the last recession in the early 90s, pay increases tended to be a little ahead of inflation and grew even further as the economy recovered. Earnings did suffer, but this was due to a loss of bonuses and overtime, not because of below inflation pay increases.” However, workers’ chances of a fair pay increase during the recession depended heavily on someone being able to make a robust case on their behalf, with union members earning around one sixth more than non-union members: “This is a good time to join a union and get your workplace organised”, Excell added.

Public versus private

While economy-wide figures stand at 3.9%, in the private sector the mid-point was 4%, with half of all settlements (the “inter-quartile range”) worth between 3.25% and 4.35%. The average increase was 3.89%. Payline also calculates the mid-point based on the number of workers, not just number of agreements. Weighted in this way the economy-wide figure was 3%. But the weighted figure for the private sector was still 4%. However, the upper quartile (top 25%) of private sector workers were covered by deals worth 6% or more on the lowest basic rate though this reflected only 4% of agreements. The picture was very different in the public sector, with a mid-point of exactly 3% but a weighted mid-point of just 2.75%. The huge local government services Green Book agreement had not been settled at the time that this report was compiled and is not included, but the NHS Agenda for Change pay rise covering 1.2 million workers (2.75%) is clearly a big influence on the overall results.

Most of the public sector agreements in the survey are grouped in three industries: health, education and public administration. While the Agenda for Change rise dominates the weighted trend in the wider health sector, other settlements grouped in the same sector (eg charities) lifted the mid-point to 3%. In education the weighted figure (2.5%) was again lower than the un-weighted figure (3%). In public administration a mid-point of 2.5% (weighted and unweighted) reflects the government’s curb on pay settlements.

There was little to choose between the mid-point results for manual-worker agreements (4%) and “single status”-type agreements covering both manual and non-manual workers (3.9%). The mid-point for agreements covering only non-manual workers was lower at 3.25% but this figure is strongly influenced by public sector agreements (accounting for over a third of the non-manual only group).

Long term pay deals

A large minority of all agreements on LRD’s Payline database take a long-term approach to pay, usually with staged rises implemented over a period of two years or more (sometimes a shorter period e.g. 20 or 21 months). As Workplace Report has noted in the past, these deals often pay a “premium” at the outset while inflation-linked clauses can produce higher payouts later on. Among 765 settlements in this year’s survey, 38% were long-term deals of which 27% (78) of the total were new this year. Existing long-term agreements with an inflation link once again topped the pay round with a mid-point of 4.5%. This is a full 1% above one-year or short-term staged deals and those with no inflation link. In between came new long-term deals (mid-point 4.1%). In the 2006-07 pay round the proportion of existing long term deals with an inflation link was slightly smaller but the pattern of settlements was similar. An explicit link to some measure of inflation (usually the RPI) is not the only protective aspect of the best of these deals: negotiators on either side may prefer the certainty of a known pay rise in year two or three, but some sort of re-opener is likely to be needed to prevent an unfavourable outcome. For example, the new three-year Thermal Insulation Contractors Association agreement provides for pay rises of 6% in years two and three (following a 7% rise last January) but should inflation statistics for 2009 and 2010 be higher than 6%, consideration is to be given to increasing the 2009 and 2010 award.

A new three-year agreement at Yorkshire Regional Newspapers (4.59% to 5.66% for qualified journalists and 4.55% to 8.16% for unqualified journalists) provides for increases of RPI plus 0.25% in the second and third years, but if the RPI is outside of a predetermined band, negotiations will reopen.

A two-year deal at distribution company 3663 provided a 3.25% increase on all basic rates of pay and fixed allowances in the first year, with a further adjustment to ensure the 3.25% is applied to all bonus elements of pay. A similar clause will apply again in 2009, but negotiations can reopen should there be significant changes in the economic situation that would warrant further discussions.

Other negotiated elements

Pay bargaining often has more to it than a simple haggle over the size of the cost-of-living rise. Examples are provide in the industry sector boxes but the commonest issues covered by pay deals in 2007-08 included:

• Pay elements

• Pay systems

• Working time and leave

• Equality and family friendly arrangements

• Issues of fairness

• Other benefits and entitlements.

Pay systems and structures were either affected by or relevant to the terms of the settlement in 177 agreements (23%). The two big themes under this heading were performance-related pay in 35% of this group of settlements, 8% of all agreements (62 agreements) and bonuses in 29% (or 7% of the survey as a whole, 52 agreements). Other features identified under this heading included pay progression (12%), pay levels for specific staff groups (11%), other aspects of the pay structure (9%) and the use of market data to reference pay levels (8%, 15 agreements but including some big employers like the banks). Other bargaining topics included here are productivity, incentives, profit-related pay, individual pay, probationary, promotion and “acting up” arrangements, commission schemes, skills pay and TUPE.

Pay elements and allowances featured in 149 (19%) agreements. Allowances generally were adjusted, introduced or otherwise referred to in 36 cases (24% of the 149 agreements). London, regional or location pay were referred to or adjusted in 29 cases (19%). Travel-related provisions crop up in 28 cases (19%). Twenty-one of those employers (14%) included a lump sum payment in their settlement. Other common elements referred to (but not necessarily improved) were sick pay or sickness absence (20, 13%), attendance bonus (19, 13%), First aid (11, 7%) and a range of other issues (subsistence, meals, recruitment and retention, safety pay, training payments, “hot-spot” pay (extra money to address recruitment or retention) and supplements.

Working time and leave issues cropped up in 131 (17%) agreements. Again, while these are not necessarily improvements, (some cases signifying simply that premia have been increased in line with the pay rise), but there is clearly some movement in this area with some employers (for example) adjusting their holiday provisions in response to increasing statutory entitlement under the Working Time Regulations. Most frequently, settlements affected holidays or holiday pay (45 out of 131, or 34%); shifts, nights or unsocial hours (24%); hours (15%); overtime (15%); other premia (11%); standby and callout (10%) and a range of other topics including annual hours, bereavement leave, breaks, flexitime, rostering and weekend work.

Equality, work-life balance and family friendly policies figured in 29 (4%) agreements. The main developments here are improvements in paternity and maternity leave entitlement (26 agreements reflect one or the other). But adoption and parental leave entitlement, flexible working, equal pay (eg audits), family friendly policies, home working arrangements and work-life balance get a mention in a handful of agreements.

Other benefits, entitlements and procedures cropped up in 30 cases (4%). Pension-related developments – not always positive – figured in at least a dozen agreements, ranging from changed contribution levels to adjustments in pensionable pay. Other subjects grouped here include health care schemes, long service awards, death benefits, salary sacrifice schemes and flexible benefits, staff discount, an employee help line, drug and alcohol policies, share schemes, redundancy and other procedures.

Enhancing low pay

While percentage pay rises are the norm, flat rate deals have historically been used to level up pay rates. Bridge Aluminium provided a rare example of this approach at the very start of the 2007-08 pay round with a flat rate increase of £9.00 per week on all basic rates of pay.

Across the board deals sidestepping performance elements also tackle the “fairness” agenda. At SELEX Sensors and Airborne Systems, April’s 3.5% increase applied across the board, performance-related pay having ended after 15 years. The 3.9% rise at the Principality Building Society was also applied across the board. And in the charity sector, where performance pay also plays a role, Save The Children’s 3% rise applied across the board, with no other changes to terms and conditions.

Consolidation of existing money from the pay “superstructure” into basic salaries (typically, switching money from bonus schemes and other variable payments to basic pay) can enhance the value of a straight percentage rise. At Grampian Country Pork (Ashton) a 62 pence per hour bonus was consolidated into all basic rates as part of the latest staged pay deal and this is now used in all calculations based on basic rate of pay, except overtime pay.

Freezes and imposed deals

Pay freezes were rarely implemented without compromise elements. Bargaining groups affected included BBT Thermotechnology UK (although a 3% increase from January 2009 has been agreed and an efficiency bonus could yield up to £1,000); the car delivery minimum standards national agreement where there was change to basic rate of pay in January); Home Delivery Network (where there were one-off gross payments of £350, or £175 for workers on less than 16 hours); and Terex (already hit by redundancies) where there was expected to be no pay increase without an upturn in the construction industry. Walford and North Shropshire College and manufacturer Cobble Tufting Machinery also had pay freezes.

More widespread were imposed pay rises. Although Payline is primarily a database of collectively-negotiated pay deals, rises were imposed without agreement in at least 27 cases (3.5% of agreements). Many of these were in the civil service, where the Treasury has been insisting on pay curbs, and included the 2007 police pay settlement. Other examples included Adam Smith College (3%), bus company Arriva Northumbria (including the final stage of a three-stage pay award in September 2007); Ecclesiastical Insurance (paybill increase 3.8%); and Hanson Brick (3%).

A rougher ride to come

By industrial sector the energy, water, mining and nuclear industries recorded the highest pay settlement mid-point (4.3%, 4.6% weighted) followed by construction at 4.2% (6% weighted) and transport and communications (4.1%, 4.1% weighted). Matching the overall mid-point at 3.9% was the chemical, mineral and manufacturing sector (weighted 3.6%). A mid-point of 3.65% but a weighted figure of 4% in engineering suggests larger engineering firms have set the pace.

In retail, wholesale, hotels and catering the trend was more subdued with a mid-point basic pay rise of 3.2% This corresponds directly with the percentage increase in the adult rate of the National Minimum Wage implemented in October 2007 (the most recent increase, implemented this month, was 3.8%) emphasising the predominance of low-paid work in these industries.

Struggles to overcome bargaining fragmentation in the civil service, and the transport sector (as at Asda in 2006), and concerted attempts to tackle “fairness” including union action against “zero-per cent” performance pay, the use of underpinning one-off awards and other deals sidestepping performance elements have all been minority – but significant – elements of this pay round. Next month’s issue of Workplace Report will look in more depth at some of these trends.

With numbers of new long term deals holding steady these could provide a calm centre at the heart of the storm that seems to be descending on the economy. Despite the noticeable effect felt from inflationary upward pressures, the 2007-8 pay round could prove to be a model of stability in comparison with the year to come.

Median increases in lowest basic rates by sector

The table shows the median percentage increase for each sector/employer type, followed in brackets by the number of agreements/workers covered.

Note that the number of workers covered is not known for all agreements.

* Includes voluntary organisations