PAYROLL - 07.10.2011

Forecasting pay rises for 2012

Minimum wage and inflation increases. On October 1, the National Minimum Wage (NMW) adult rate increased by 2.5%, or 15p, to £6.08. In contrast, the latest figures from the Office for National Statistics show that CPI inflation rose in August to 4.5% with the RPI figure for July at 5.2%. With such a difference in these percentages, what increase in staff costs should you be using for your 2012 forecasts?

Latest figures for pay awards. Actually, the smaller increase in the NMW follows the trend of average pay awards in the past year being well below the prevailing rate of inflation. Figures released last month by Incomes Data Services (IDS), a leading pay and benefits analyst, show that the average pay rise for the three months to July 2011 was 2.5%, and it has been at this level since January 2011. They go on to show that two-thirds of pay awards are between 2% and 3% with clusters at each end of the range. There was a slight difference between the sectors, with manufacturing averaging 2.9% and private services 2.5%. This shows that the current high rate of inflation should not be a reason for your company to be pushed into giving pay rises above what it can afford.

Tip 1. Prepare your 2012 budget initially with the 2011 actuals for staff costs. Once you have done this, flex the forecasts for different increases (e.g. 2%, 2.5%, 3% etc.) in staff costs to see what impact this has on the forecast profit and loss and cash flow position. Present the different scenarios to your board so that they can agree to the proposed increase.

Tip 2. To avoid damaging staff goodwill, ideally give the same standard pay increase to everyone and explain that the below inflation increase is on par with the rest of the economy. If you feel that someone deserves a higher pay rise, give them a discretionary bonus instead. The added advantage of a bonus is that it won’t increase their basic salary which is used as the basis of future pay rises, pension contributions etc.