UK inflation rose from 5.1% to 5.4% in December, the highest in 30 years according to the Office of National Statistics (ONS). The Bank of England has forecast that inflation will rise to 6% by April 2022. Other forecasts also expect inflation to peak around or above 6% by April this year.

For many, the impact of rising costs seems far greater, with soaring energy bills and food prices squeezing household incomes. Between January and November 2021, gas prices increased by 28% and electricity prices by 19%. Low-income households spend a larger proportion of their income on energy and food, and hence will be hit the hardest. Inflation remains the dominant question for many organisations setting or revising their pay increase budgets for 2022.

Higher Salary Budgets Predicted in 2022

Despite the pandemic and uncertainty throughout 2021, most organisations continued with their regular pay review – in many cases increasing their budgets compared to previous years. This was driven in part by the great resignation and the challenges of attracting and retaining talent in an unusual labour market.

We ran a pay forecast survey at 3R Strategy, collecting data from over 100 participants on pay increase forecasts for 2022. The survey was published in early October and the median pay increase was 2.5%, with the life sciences and technology sectors indicating a higher median of 3.75%. However, all signs now point towards higher numbers in 2022, with many organisations adjusting their salary budgets.

The latest figures from Willis Towers Watson suggest an increase in the average pay forecast of 3.2% for 2022. Although this is higher than what was predicted a few months ago, we are hearing of even higher budgets in conversations with clients and HR/reward networks. The manufacturing and general industry sectors continue to range from budgets of 2.5%-4%, which in most cases are higher than last year.

The non-profit sector is also seeing higher pay budgets, as many charities and non-profits have historically aligned their pay budgets with inflation and cost of living. If organisations aligned their pay increase budgets to inflation when it was 1%, they face a moral obligation to align themselves to these higher rates and increase their budgets. As a result, some organisations in the charity sector are setting budgets of 5-6% for 2022.

Technology-focused organisations and those with a limited pool of highly specialised employees, such as life sciences and biotech, are seeking even higher pay increase budgets as they continue to face the challenge of attracting and retaining talent in a candidates’ market.

While many of us are reacting to rising inflation and tough market conditions, these higher budgets make it more important than ever to have a clear strategy on what we are trying to achieve. This may seem obvious but having a set of objectives that you communicate clearly to employees is critical. Having higher budgets alone will not enable us to engage and retain our people. We can focus too much on what we pay but what is more important is that our people perceive the process to be fair and equitable.

Written by Rameez Kaleem


3R Strategy is an independent reward consultancy helping organisations to build a culture of trust through pay transparency. Book a free discovery call with us today.