Private sector employers are predicting a 2.5% pay award over the next year, according to pay specialists XpertHR.

Based on a survey of predicted pay awards for 343 groups of employees in the private sector, findings include:

• The median (midpoint in the range of values) pay increase in 2013 is forecast to be 2.5%.
• Pay awards are expected to be tightly bunched around the median, with seven in 10 of all pay awards in the next year likely to be worth between 2% and 3%.
• Manufacturing and production firms are forecasting a higher increase – 3% – than companies in the services sector – at 2.4%.
• Pay freezes are predicted to account for less than 10% of all pay awards.

When asked about the factors expected to influence the level of their next pay award, almost all respondents (92.5%) cited company performance/ability to pay. Almost as important will be inflation (79.5%). While inflation is expected to present an upward influence to pay award levels, company performance is expected to exert a downward pull.

However, there is evidence that employers are worried about skills shortages and employee engagement – which may push pay levels up. Recruitment and retention was cited as the most important upward influence on pay settlements over the next year.

Pay awards fall back

Analysis of the current picture of pay settlements reveals that in the three months to the end of September 2012, the whole economy median pay award fell to 2% (from 2.4% in the previous quarter). The fall was caused not only by continuing freezes and low pay awards in the public sector, but also weakness in private sector awards – the median award in the private sector fell from 2.5% to 2.3%.

With retail prices index (RPI) inflation at 2.6% in September 2012, the gap between private sector pay awards and inflation has fallen to just 0.3 percentage points. This may be as close as it gets – with inflation predicted to rise again in October.

According to our pay forecasts survey, inflation remains a key factor in the determination of pay budget increases. However, while almost all organisations (83.3%) refer to the RPI measure, employers are increasingly also referring to CPI inflation (58.3%).