What to expect from this year’s round of pay negotiations and how to soften the blow

Several factors are adding to the pressure on employers to offer pay rises this year.

Prior to the 2024 autumn statement, the indications were that pay rises would continue their downward trend in 2025.

Our recent Pay Trends research found only 23% of companies planning for pay budgets of 5% or more in 2025, compared with 54% in 2024.

Broad pay expectations this year are for increases between 2 and 4%, with a median uplift of 3% - a drop from 2023 and 2024 but still above the 2% pre-pandemic averages.

From April, the uplifts to the national living wate (NLW) and National Insurance will turn up the cost pressure on businesses and the widespread expectation is that these increases will impact pay conversations.

One third of the companies we surveyed had already adjusted their 2025 pay budget, and almost half were considering a pay pot reduction.

So how can employers move to mitigate these challenges in 2025 and beyond?

Focus on pay progression mechanics

All businesses and managers want to be able to accelerate pay for strong contributors but competing priorities and limited financial resources make this difficult.

Most of the pay review budget goes to ensuring we keep up with the market, leaving little to progress pay beyond market adjustments.

This is a particular challenge when the market for key roles is moving fast.

If the estimated cost of replacing an employee varies between £14,000 and £50,000, it is worth doing all we can to keep those we have invested in, but half of organisations have no mechanic in place to effectively manage pay progression.

We know that when workers have a clear understanding of what they need to do to advance their salaries and grow their careers, it builds a culture of trust and fairness, motivates them and cultivates their loyalty.

To enable this, businesses need to ask some challenging questions around:

What they want to incentivise
What determines an individual’s ongoing value
How far line managers can be involved in the process, and
How best to implement and communicate a chosen process.

We believe the aim should be to maximise a worker’s lifetime value, ie the period when they are fully trained up, working at their fullest capacity and delivering the strongest return to the business.

Extending that lifetime value relies on shortening the time it takes to get them up to speed, increasing their ceiling in the business and ultimately keeping them motivated for longer.

Revise benefits

Having spent the last few years trying to maintain pay, many companies have allowed benefits packages to become outdated, especially for a more dispersed and hybrid workforce.

It is now worth revisiting those schemes with a focus on flexibility, looking at the working from home factor but also at compressed hours and options around annual and parental leave.

Financial and health benefits are also important parts of the overall package, with key spend now being afforded to support and prevention.

This includes mental health support like counselling and access to an online GPs, preventative measures such as screenings and diagnostics available via PMI or cash plans, and financial support through EAPs.

Irrespective of benefits, we are advising our clients to look at three key areas: how they are communicating their benefits; reviewing suppliers to maximising value and ROI; and looking at the HR technology solutions available on the market to package those benefits, personalise the offering and enable seamless communication.

Future-proof

There are some pending or potential legislative changes that could start to impact pay and reward in the UK.

Disconnect: Ireland, Belgium and Australia already have policies giving employees the right to opt out of communications outside of work hours to promote work-life balance
Pension death benefits: consultation is underway on whether pensions should form part of an individual’s estate for IHT purposes, and how this may impact death-in-service benefits.
Parental leave: new policies driven by Gender Parity Accelerators in Scandinavia have already seen those nations rise to the top of the world rankings in Gender Pay parity.
Enhanced flexible working rights: employees can request flexible working, with the onus on employers to demonstrate why it is reasonable to refuse (cost, quality, performance).
Stronger gender pay gap reporting: reflecting outsourced workers and introducing equality action plans, setting out how to address gender pay gap issues and supporting employees going through the menopause.

Move towards transparency

While UK companies are not directly impacted by the EU Pay Transparency Directive, it is gaining momentum as a younger generation enters the workforce and the government commits to Make Work Pay for all.

Whether driven by legislation or simply an appetite to stay in touch, we anticipate certain actions and measures over the next 12 to 18 months:

Collection of employee data: many organisations will need to collect more data on their workers, which is likely to require some form of Job Evaluation exercise.
Job levelling: to establish work of equal value and provide information on average pay levels for comparable work, organisations will need to be confident in their definitions.
Establish or review pay structures: to provide pay ranges for fair recruitment that is free of bias, organisations will need some form of pay structure, or to review current models. This will also require regular monitoring via equal pay audits, the tracking and reviewing of starting salaries, monitoring of pay progression by gender, ethnicity or dis(ability), the reviewing of salary decisions by gender for internal moves vs external hires, and better Gender Pay analysis.

To make information easy to understand around pay decisions, the setting of salaries and pay progression, communication needs to be clear and concise.

Where companies leave an information vacuum, employees will either fill in blanks with inaccurate data they find online or listen with greater interest to what other companies are offering.

By communicating effectively around pay decisions and their EVP, companies can help workers better understand the contents of their wider reward offering and reinforce its value.