Private sector pay sees bonus bump

Employee bonuses that were deferred to benefit from April’s reduction of the top income tax rate from 50% to 45% caused year-on-year average weekly earnings growth to increase from 0.1% in the first quarter of 2013 to 3.4% in the second quarter, according to the Bank of England Monetary Policy Committee’s (MPC) August Inflation report.

The report said: “It is plausible that the underlying private sector pay growth has remained close to 1% since the start of the year.”

The MPC expected any increases during the rest of 2013 to be down to deferred bonuses.

This data was reflected in a separate report by the Office for National Statistics (ONS), Labour market statistics, published in August 2013, which revealed that average weekly earnings, excluding bonus payments and before tax, were £447 in June, up from £443 in June 2012, a rise of 1.1%. It found that the average weekly wage, including bonus payments, rose by 2.1% between April and June 2013.

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David Wreford, a principal at Mercer, said: “Nothing much has changed in the last few years with respect to pay for the broader workforce. It has hovered around 3% [of base pay] for the last couple of years and it is projected to be around 3% next year [according to Mercer’s Salary movement snapshot, published in November 2012]. Those people in reward budgeting should have that figure in mind.”

The MPC’s Inflation report also showed that in the first financial quarter of 2013, real income was still below its 2007 peak. By comparison, in the 1990s economic recovery, real income was about 12% above its pre-recession level, the MPC said. It cited poor productivity growth and slack in the labour market, with substantially more job seekers than there are jobs in the market, as having constrained pay.

Hiba Sameen, a researcher for The Work Foundation’s Big Innovation Centre, said the rise in pay was still significantly higher than expected given the high unemployment rate of 7.8%. “One of the key judgements around wage growth and how that affects inflation is how much spare capacity there is in the economy,” she said.

“If there is a large amount of spare capacity in the economy, in the medium term you would expect wages to turn downwards and not have an inflationary impact on the economy and you would expect the unemployment rate to fall as well.

“The slack in the economy requires a reallocation and a rebalance [of labour] for that spare capacity to become usable.”