Pay award trajectory has peaked

The results were collected between 5 and 20 July 2023.

Pay awards forecasts for 2024 range between 3.8 and 5%, with 5% currently being the most common prediction. Overall, the results suggest that organisations are currently split in their approach between:

1) 32% who predict a similar pay award to this year (3, 4 or 5%) in 2024; and 2) 54% who predict a smaller pay award, for example between 3 and 4%.

The influence of inflationary figures can be measured by comparing historic inflation with pay figures from Paydata’s historic pay database. This analysis highlights how, as inflation has risen, so too have actual awards, when compared with predicted awards in the preceding year:

• For example, predicted 2022 awards in autumn 2021 were 2 to 3% but by the end of 2022, actual awards were between 3 and 4%.

• Likewise, predicted 2023 awards in July 2022 were 3 to 4% but are currently largely 5%.

However, unlike in 2021 and 2022, inflation has started to fall this year. The latest inflation figures released by the ONS last week show that the Consumer Price Index (CPI) has reduced from 8.7% to 7.9% and the Retail Price Index (RPI) from 11.3% to 10.7%.

The comparison of inflation to pay awards up until this year indicated that cumulative pay awards from 2014 to 2021 outstripped inflation, only to be overtaken by inflation by the end of 2022. This is due to average pay awards (3%) being significantly below the average annual inflation (4.6%) in 2022.

Even though the pace is slower than the Monetary Policy Committee predicted, inflation has started to plateau. When it comes to next year’s predictions, Paydata does not anticipate the same incremental pay award increases between now and the end of 2024.

Paydata’s analysis highlights that there is greater opportunity to differentiate pay awards when they are higher, at 5 to 6%. The most popular method of distributing pay awards in 2024 is an across-the-board increase for 38% of employers, but 33% will use a combination of across-the-board and individual increases.

This is where an employer may provide a standard increase to everyone of around 3-4%, while reserving an additional 1-2% for higher performers or roles that have a higher market premium, as an employee retention tool.

Director and reward expert Tim Kellett said, “Our survey currently suggests differing pay approaches for 2024. Whilst some organisations may agree on a higher pay award to account for sustained high levels of inflation and the ongoing cost of living crisis, others cannot afford to maintain this year’s elevated awards.

“In June, the most commonly quoted 2024 award was 4%. By July’s pulse survey, the median has shifted to 5%. This may be because inflation has not reduced as quickly as predicted at the outset of the year. However, affordability remains a key issue, demonstrated by the majority of organisations predicting a lower pay award next year.”