Almost half (49 percent) of UK employers have reported that salary budgets for the 2024 pay cycle are down from 2023 levels.
The overall median pay rise for 2024 had fallen to 4.6 percent, compared with 5.3 percent for the previous year, according to the data from the Salary Budget Planning Report by WTW.
Employers have been more conservative with salary budgets as a period of high resignation and staff turnover appears to have passed, meaning organisations have maintained headcount and are looking to longer term stability in their employee base.
Attraction and retention challenges
Challenges around attracting and retaining talent are affecting fewer employers this year, with 39 percent reporting it as an issue in 2024, down from 48 percent over the past two years.
However, overall salary budget increases are expected to rise by 4 percent in 2025, WTW said.
The report said this was still fairly high even though salary budgets have consistently declined since 2023.
Total annual payroll expenses, which includes salaries, bonuses, variable pay and benefits, continue to rise substantially in the UK. Three quarters (75 percent) of companies reported that their total payroll was higher than last year.
Inflation affect
Inflation can impact salary budgets in both directions. For example, organisations that lowered salary budgets pointed to inflationary pressures, concerns related to cost management and weaker financial results as the main reasons. Employers that raised salary budgets this year also pointed to inflationary pressures as well as a tight labour market.
UK inflation rates are at their lowest since 2021, having dropped significantly in 2024.
The latest figures from ONS, released 19 June, 2024, show that the 12 month rate for the consumer prices index (CPI) was 2 percent in May 2024, while CPI including owner occupiers’ housing costs (CPIH) was 2.8 percent for the same 12 month period.
WTW said the inflation rate is expected to remain at a similar level in 2025.
The evolving economic landscape has prompted 45 percent of employers who have already made compensation changes, or are planning to, to conduct a full compensation review of all employees’ remuneration.
A similar proportion (42 percent) of employers have increased starting salary ranges, and a similar percentage again (41 percent) have reviewed compensation for specific groups.
Holistic approach
The report also said that organisations are taking actions to address current market conditions and employee needs, with broader emphasis on diversity, equity and inclusion, more workplace flexibility and improving the employee experience.
Paul Richards, Europe rewards data intelligence leader at WTW, said “As the workplace stabilises and employers look more towards the future, companies are aligning pay priorities with their compensation philosophy and business strategy.
“In light of inflationary pressures, cost management concerns, and continued tight labour market in some areas, employers are taking more of a holistic approach to their rewards programmes, factoring in bonuses, long-term incentives and health and wellness benefits.
“However, a more targeted review of specific employee groups could allow for greater support for those roles/skills in demand or those in lower salary ranges. Pay transparency and equity is top of mind for employers and giving a big-picture view of what employees are offered can ensure the salary increase process is clear and emphasise the connection between pay increases and business performance.”
