Wage formation: the UK

  • Observatory: EurWORK
  • Topic:
  • Published on: 30 March 2009

United Kingdom
Andrea Broughton

Disclaimer: This information is made available as a service to the public but has not been edited or approved by the European Foundation for the Improvement of Living and Working Conditions. The content is the responsibility of the authors.

This contribution examines wage formation in the UK, including overall data relating to pay, the implementation and influence of the National Minimum Wage, and wage formation in the IT sector. Collective bargaining in the UK is decentralised and takes place mostly at company or workplace level, especially in the private sector, albeit to a limited extent. The UK has had a National Minimum Wage since 1999 and this is deemed to be functioning well. It is uprated periodically by the government, following recommendations by the Low Pay Commission. Pay in the IT sector is set at company or workplace level.

1. Systems of wage formation

a) Please briefly describe the main systems of wage formation in your country (when relevant please distinguish between private-public sector). For example:

  • is the system underpinned by legislation or collective bargaining, a mixture of both, or other factors, such as the labour market?
  • who are the main actors?
  • do state bodies play a role in wage setting?

Collective bargaining in the UK is highly decentralised: most bargaining is at company or workplace level, with relatively little multi-employer bargaining outside the public sector. Incomes Data Services (IDS) gives this succint overview of the way in which pay is determined at company level in the private sector in the UK today:

Most pay determination in private sector companies today centres on budgets set by the finance department, in consultation with HR, and either subject to negotiation with a trade union or staff association or distributed as an award via line managers around central performance criteria … Quite often the budget for pay, even among firms with individualised performance-related pay, bears an uncanny resemblance to the ‘going rate’ for pay settlements elsewhere and the rise in the cost of living.

IDS Pay Report 1000, May 2008, p.20. Incomes Data Services, UK.

Since the 1980s there has been an ongoing decline in the incidence of pay bargaining between employers and trade unions in the UK. The results of the 2004 Workplace Employment Relations Survey (WERS 2004), published in July 2006 (UK0607019I), showed that this declining trend is continuing: 27% percent of workplaces with 10 or more employees (accounting for 48% of employees in such workplaces) recognised trade unions for the purposes of negotiating pay and conditions for at least some of their workforce, compared with 33% (covering 53% of employees) in 1998. Overall, it is estimated that only 11% of private-sector workplaces engage in any form of collective pay bargaining.

Nevertheless, collective bargaining remains relatively strong in the public sector, with 75% of employees covered by collective bargaining agreements and more than 33% of workplaces covered by multi-employer bargaining. The largest group of public sector workers is the 1.4 million workers in the local government sector who are covered by pay awards negotiated by employer and local government employer representatives on the national joint council for local government services.

In the case of certain groups of public sector workers, for example teachers, National Health Service (NHS) workers), doctors and dentists and prison officers, pay is set by the government, after considering the recommendations of independent review bodies. In the case of teachers, for example, in its most recent recommendation, the School Teachers Review Body (STRB) recommended pay increases of 2.45% from 1 September 2008 and indicative increases of 2.3% from September 2009 and 2.3% from September 2010. This year, the government decided to implement the recommendation for 2008 in full. However, teachers’ unions took strike action in support of higher increases (see also below).

Some bargaining over minimum rates of pay takes place at sector level in the private sector, between trade union and employer representatives in a joint body, such as a National Joint Council (NJC). Private sector industries covered by sectoral bargaining include paper, printing, electrical contracting and engineering construction.

Trade unions in the UK are organised in a range of different ways, including along occupational lines, industry lines and general unions. The trade unions of most union members are affiliated to the Trades Union Congress (TUC). The past few years have seen mergers between trade unions in the private sector. For example, on 1 May 2007, Amicus and the Transport and General Workers’ Union merged to form the new union, Unite, concluding a merger process underway since 2005 (UK0612019I).

The Confederation of British Industry (CBI) is the main employer body at national level, although, like the TUC, it has no mandate to collectively bargain and bind its affiliates.

The industrial relations system in the UK is essentially a voluntaristic system, characterised by the relative absence of the state from direct intervention in industrial relations and the primacy of voluntary collective bargaining as the preferred method of labour regulation. However, trade union recognition legislation (the statutory trade union recognition provisions of the Employment Relations Act 1999 (UK9903189F) underpins the right of trade unions to be recognised for collective bargaining purposes if they fulfil certain criteria within a bargaining unit.

For an overview of the industrial relations system and background in the UK, see the EIRO UK Industrial Relations profile: http://www.eurofound.europa.eu/eiro/country/United.Kingdom.htm

b) If collective bargaining is the main determinant, what is the main level at which this takes place (national, sectoral, and/or company level)? Where relevant, please refer to other European Foundation studies that you have written in this context. Where collective bargaining fails, what is the role of labour market institutions (i.e. labour court, labour commission)? Provide an example if relevant.

Collective bargaining mainly takes place at company level in the UK. However, there is some sectoral bargaining over minimum rates in the UK, plus some sector-wide bargaining for some craft and manufacturing areas, mainly in the construction sector (see also above).

If collective bargaining fails, the parties may decide to enter formally into dispute, potentially involving industrial action. The parties can decide to refer the dispute to the state Advisory, Conciliation and Arbitration Service (Acas), which will offer voluntary conciliation and mediation services. Mediation is carried out by independent mediators, who will issue non-binding recommendations. Acas also offers a voluntary arbitration service, which differs from collective conciliation in that the parties jointly ask a third party to make a decision on a dispute which the parties themselves have not been able to resolve. The arbitration ruling is, however, not legally binding. Arbitration is a relatively small part of Acas’s work, mainly because it has no powers to arbitrate without the consent of both sides.

c) Monitoring. What monitoring of collective bargaining is carried out (if any)? Who carries this out? (Joint /Tripartite body at national/sectoral level)? How does it do this? Are there any studies or surveys?

The main organisations monitoring collective bargaining on pay in the UK include:

Incomes Data Services (IDS, a private sector research and publishing company). IDS carries out detailed monitoring of company-level pay settlements and pay trends in the UK, in its IDS Pay Report, which is published every two weeks. It reports on private sector and public sector settlements and also carries out research into developments at sector level in selected sectors. http://www.incomesdata.co.uk/

Industrial Relations Services (IRS, also a private sector research and publishing company, part of Reed Business Information, RBI). IRS also carries out monitoring of company-level pay settlements and pay trends, published as part of the RBI XpertHR service, http://www.reedbusiness.co.uk/rb2_products/rb2_products_xperthr.htm

  • the TUC, tuc.org.uk/
  • the Labour Research Department (a trade union-funded research organisation, http://www.lrd.org.uk/), which publishes a range of collective bargaining studies.

2. Wage developments

a) Please briefly describe any major overall wage development trends over the past five years (refer to previous EIRO updates where appropriate)

The average collectively-agreed pay increase in the UK was 3.4% in 2005 and 3% in 2006 (EIRO Pay Developments 2006 – (TN0704029S).

The latest figures from the IDS show that the median pay settlement for the three months to the end of January 2008 was 3.5%, which is the same level as the previous year. This data is taken from the IDS Pay Databank, which records pay settlements across the whole of the UK, covering around 9 million employees in total (from IDS Pay Report 996, March 2008. Incomes Data Services, UK.. The figures represent increases to basic pay, excluding bonuses or lump sum payments. For an overview of IDS data on pay increases over the past five years, see the table below.

Table 1: Median pay settlement levels in the UK, 2004 - 2008
Date Median pay settlement level
3-month period to January 2004 3.0%
3-month period to January 2005 3.3%
3-month period to January 2006 3.0%
3-month period to January 2007 3.5%
3-month period to January 2008 3.5%
Based on data from the IDS Pay Databank

The figure of 3.5% for median pay settlements is also given by Industrial Relations Services (IRS), in its monitoring of pay developments over the three months to the end of March 2008.

The very latest figures issued by IDS in May 2008 show that there is an upward trend, with the median pay settlement for the three months to the end of April 2008 having risen to 3.8%.

Pay monitoring experts in the UK are watching rising inflation in the UK to ascertain whether this will have an effect on pay settlements in the country. There is a view from the Bank of England’s Monetary Policy Committee (MPC) that increases in the price of energy and other types of imported costs will have a limited impact on wage costs, as employers will be keen not to increase their labour costs as well as their costs relating to elements such as fuel. Further, the current economic uncertainty might exert a downward pressure on wage demands, in the context of fears about employment. Nevertheless, the Bank of England has stated that rising inflation and the expectation of rising inflation over the next year may provide upward pressure on settlements in the future.

One further trend has been towards longer-term agreements in some sectors, covering two or sometimes three years, rather than the more standard 12 months.

b) What developments have there been regarding equal pay between men and women in your country? Is this an issue for debate?

This is an issue for debate in the UK. The latest figures from the UK Equal Opportunities Commission (EOC, now part of the Commission for Equality and Human Rights, CEHR), issued in July 2007, show that in full-time work, female employees earn 17% less an hour on average than male employees. The EOC estimated that although the situation is improving, it will take 20 years for the gap to be closed. Further, female employees in part-time work earn 38% less than the hourly rate of men in full-time work. (UK0708029I).

Periodically, equal pay cases are brought, under the Equal Pay Act 1970. One of the latest of these was in April 2007, when the House of Lords ruled in favour of 36 catering staff who claimed that they were victimised by St Helens Borough Council in Merseyside, after they brought equal pay claims against the local authority. (UK0706049I)

In February 2006, the government-appointed Women and Work Commission published a report setting out recommendations for combating job segregation and the gender pay gap. These included:

  • a GBP 20 million (€29 million) government-funded programme to enable adult women to improve their skill sets;
  • a new vocational curriculum to encourage girls to consider non-traditional jobs;
  • the promotion of apprenticeships for women, especially in sectors with skill shortages;
  • an initiative to promote quality part-time work – in particular, the commission wants the government to encourage private sector employers to open senior jobs to part-time and flexible working time arrangements in order to help working mothers;
  • support for the training and development of workplace equality representatives;
  • extending the right to request flexible working to cover a wider group of employees;
  • better management training in diversity and flexibility issues;
  • the use of clauses in public sector contracts to promote effective equal pay and gender equality action by private contractors;
  • a network of best practice companies that conduct equal pay reviews, provide work experience for girls in non-traditional jobs, and set up women’s networks in senior or traditionally male jobs.

However, although trade unions welcomed its recommendations, they criticised the report for not proposing mandatory equal pay reviews (UK0603019I).

c) Please briefly describe the main recent sectoral agreements and outcomes in terms of pay

As collective bargaining in the UK is decentralised, there are a range of settlements taking place throughout the year, although settlements often cluster around the spring and/or the autumn. There have been a range of sectoral awards covering public sector workers in recent months, although these have been causing some industrial unrest due to a government policy of public sector pay restraint (see also below). The main awards include a 2.5% pay increase for prison officers in 2007 and a 2.5% increase for police officers, although this was effectively reduced to 1.9% due to a delay in implementation (UK0804029I). Most recently, doctors and dentists have been awarded a 2.2% increase, from April 2008. A pay deal for around 1.4 million local government services workers is still being negotiated, although some councils that have opted out from national bargaining have applied increases from April 2008 which range from 2.5% to 3.3%.

d) Are there any noteworthy trends at company level, such as an increasing individualisation of pay setting?

There has been an increase in the incidence of performance-related pay, according to analyses of the Workplace Employment Relations Survey (WERS) 2004. These findings show an increase between 1998 and 2004 in the proportion of workplaces that use performance-related pay schemes. For more details, see UK0612059I.

There has also been an increasing incidence of variable pay in the UK in recent years. For more details, see the UK contribution to the forthcoming CAR on wage flexibility: UK0803019Q

e) Recent main actions/strikes /protests on wages

One of the most high-profile events of recent months in the UK has been a one-day strike over pay held by teachers on 24 April 2008 (UK0804029i). This was the first national teachers’ strike since 1987 and took place against a background of wider trade union unrest over public sector pay restraint among groups such as police officers, prison officers and school inspectors.

In June and July 2007, postal workers at Royal Mail held two 24-hour strikes in protest against pay and company modernisation plans. These protests were the first national postal strikes to be held since 1996 (UK0707069I).

f) What are the main social partners’ views on wage developments in your country?

The TUC and the CBI were contacted for this study. The view of the TUC is as follows:

There is general concern amongst trade unions that average wage settlements have been running below RPI inflation during the last year. Moreover, in the last twenty years the share of the UK economy has fallen from 58.9% to 54.7% (ONS website). 

Private sector wage bargaining in the UK largely takes place at the level of the workplace or enterprise. There are very few regional or national agreements. Although overall UK trade union membership has been relatively stable in recent years, trade union density in the rapidly expanding private sector has fallen to 16.2 per cent (UK Labour Force Survey, Autumn 2007).   

In the public sector, the government has set a cap of 2% on the wage bill. This figure is considerably below the current rate of retail price index (RPI) inflation in the UK, and is a strong source of industrial tension that has led to some one-day strikes in parts of the public sector in recent months. 

Unions have been reallocating more resources into recruitment in recent years in an attempt to build up membership. Unions are also campaigning to change the UK's complicated trade union and strike ballot laws, which they feel constrains their ability to bargain effectively in some cases. 

The view of the CBI is that, from a business perspective, the UK system of decentralised wage formation works well, and has produced good pay growth, in line with economic growth, in recent years. The UK system is flexible, which makes it able to react readily to fluctuations in the labour market or in the economy. Overall, the decentralised wage formation system serves the UK economy and labour market well.

3. Minimum wages

In this section, we are aiming to update information from the previous study on the minimum wage (http://www.eurofound.europa.eu/eiro/2005/07/study/index.htm)

a) Does your country have a national minimum wage? How is it defined? How is it set and uprated? Do you have any data as to its level and coverage rates?

The UK has had a statutory national minimum wage (NMW) since 1 April 1999 (UK9904196F). Recommendations for uprating the NMW are made to the government by the Low Pay Commission (LPC). The government then takes the final decision, in the light of the LPC’s recommendations. Most of the increases in the NMW since 1999 have been higher than inflation, reflecting both a relatively low starting rate and the robustness of the economy.

As of 1 October 2007, the main adult rate (22 years and over) of the national minimum wage is GBP 5.52 per hour. The hourly development rate for employees aged 18–21 years is GBP 4.60 per hour. The rate for 16–17 year olds is GBP 3.40 per hour.

On 1 October 2008 the NMW will rise to £5.73 an hour, the development rate to £4.77 an hour and the 16-17-year-olds rate to £3.53 an hour. This follows recommendations made by the LPC in March 2008, which were recently accepted by the UK government (UK0803019I)

In its March 2008 report, the LPC looks at the issue of lowering the age at which workers become eligible for the adult rate, from 22 to 21, arguing that 21-year-olds have similar employment patterns to workers aged 22 and 23 and therefore do not need any labour market protection (ie protection against not being employed) in the form of lower minimum rates of pay. The UK government believes, however, that 21-year-olds are closer to those workers aged 19 and 20 in terms of their labour market performance and employment prospects, and therefore do need to be ‘protected’ in employment terms by being paid lower rates. It is also possible that the age bands in the NMW may contravene the Employment Equality (Age) Regulations, introduced in October 2006.

The LPC estimates that the NMW at the current rate covers around 5% of jobs held by adults in the UK - up to 1.2 million jobs.

What are the views of the social partners and the government on the minimum wage(s)?

The TUC regards the NMW as one of the greatest successes of the current government. It states further that:

the LPC is one of the few formal mechanisms of social partnership in the UK. The LPC makes recommendations to Government, and with one or two relatively minor exceptions, government has always accepted the LPC's view. The LPC set out to recommend the highest minimum wage rates that can be sustained by the UK economy without causing net jobs losses or other significant economic side effects.

In the nine years since the minimum wage was introduced, it has risen from the middle rank of minimum wages in developed countries to being one of the highest in the world. The increase in the adult rate from £3.60 in 1999 to £5.52 in 2008 represents a rate of growth that has been twice the rate of inflation and one and a half times the rate of increase in average earnings.

The TUC supports the minimum wage because most of its beneficiaries are unorganised workers who unions cannot easily defend. The minimum wage has disproportionately benefited women and workers from ethnic minorities, who have always been overrepresented amongst the low paid. Further, 70% of the beneficiaries of the most recent minimum wage increase were women. An effective floor on wages also stops the “race to the bottom” on pay in some sectors, which would otherwise have a detrimental effect on trade union collective bargaining in some cases. 

The view of the CBI is that is in favour of the NMW in order to curb the worst excesses of low pay. The key issue, from an employer point of view, is to ensure that it is set at the appropriate level. The CBI works with other social partners and stakeholders within the Low Pay Commission and one of the CBI’s key concerns is to make sure that the rate of the NMW stays the same. The CBI believes that if the rate rises significantly, this will put pressure on employment in the UK, particularly at the lower end of the labour market. Overall, the CBI is very happy with the NMW and believes that it is entirely appropriate in the UK context.

The UK government (Department for Business Enterprise & Regulatory Reform, BERR) states that the NMW is:

an important cornerstone of Government strategy aimed at providing employees with decent minimum standards and fairness in the workplace. It helps business by ensuring companies will be able to compete on the basis of quality of the goods and services they provide and not on low prices based predominantly on low rates of pay.

Is the minimum wage a subject for debate in your country?

As the NMW is a relatively recent phenomenon in the UK, there is a considerable amount of debate surrounding it. This covers issues such as its level, its impact on employment, particularly in the case of low-paying sectors and small businesses, whether it should vary by region, the potential knock-on effect on pay throughout the economy, the impact on women’s employment, and the employment of migrant workers. These issues are raised in the LPC’s annual report on the impact of the NMW and its recommendations for future uprating.

Although the principle of the NMW is now widely accepted by employers and the business community in the UK, employers generally do not want it to be increased above the level of inflation.

There is also a view among organisations representing small businesses and sectors where the impact of the NMW is greatest, such as the retail sector, that regional variations of the NMW should be considered.

There has been debate about whether there should be differences in the NMW according to region, with London and the South-East being covered by different rates to other areas, such as the North East, Wales and Northern Ireland. It should be noted that the trade union and Greater London Authority “living wage” campagin for a higher minimum rate of pay in London has had some impact on pay for some workers, such as cleaners, in the London area.

Overall, however, the LPC has consistently rejected a regional approach to the NMW, on a range of grounds, including the fact that a regional NMW would be too complicated to advertise and enforce, and the fact that low pay is found in all regions of the UK, with the differences between regions being usually small – the main differences in pay tend to be within regions. IDS has stated that there appears to be a case for the minimum wage in London to be higher than elsewhere in the country, as living costs there are far higher there than elsewhere in the UK (Viewpoint: “Should the National Minimum Wage vary by region?”, IDS Pay Report 984, September 2007). IDS also points to campaigns by trade unions and community groups for a ‘living wage’ for certain employees in the capital, such as contract cleaners, resulting in an hourly rate that is significantly above the NMW. However, IDS concludes that “it really is difficult…to see how regional variations in the NMW could be practically effected. The case for the simplicity of a single national minimum wage remains compelling.”

In evidence to the LPC’s latest report on the NMW, a few employer representatives made a case for a NMW, but the CBI and the TUC favour the continuation of a statutory national minimum.

There are also some compliance issues. Despite the fact that the NMW has existed in the UK for a number of years now, the Office for National Statistics (ONS) estimates that in spring 2007, 292,000 jobs with pay less than the NMW were held by people aged 16 and over, constituting 1.2% of UK jobs (http://www.statistics.gov.uk/pdfdir/lpay1107.pdf).

The impact of the NMW has been felt more in some sectors than others. For example, it has resulted in higher increases towards the bottom of pay scales in the retail sector, such as the starter rates. Some retailers have merged their lowest pay scales and this in turn has narrowed the differential between starter and more established rates of pay. Organisations in the fast food, pubs and restaurants sector predominantly use the minimum wage as a starter rate. However, there is some evidence that the impact of the NMW is lessening – only a third of retailers set the NMW as their minimum starter rate in 2007, compared with two-thirds in 2006 (more details can be found in the IDS Pay Report 993, January 2008: “Pay and conditions in retail.”).

Do you have any data on the minimum wage in relation to average wages, how it interacts with the tax system and any effects it is having on employment?

The LPC looks at a wide range of issues connected with the NMW in its annual report on its impact. Amongst these are its impact on employment, at its current rate. In its latest report, issued in March 2008, the LPC states that the NMW at its level of £5.35 in October 2006 has lead to an increase in the proportion of jobs paid at the minimum wage, and that this increase was most evidence in the low-paying sectors, such as retail, hospitality, social care, childcare and cleaning. As a result of this increase, there has been an increase in the ‘bite’ of the NMW – ie its relative level when expressed as a proportion of the average hourly wage. The LPC states that the ‘bite’ of the minimum wage rose to 51.1 per cent of medium hourly earnings in April 2007.

In general, the LPC states that women are more likely than men to be covered by the NMW, due largely to the fact that women are disproportionately represented in low-paying sectors. The LPC states that the NMW has helped to close the gender pay gap among the low paid, although it has not had an impact further up the earnings distribution.

Overall, the employment rate of women does not appear to have been affected by the introduction of the NMW.

One other area of interest is the effect of the NMW on migrant workers, and specifically the relatively large number of workers who have come to work in the UK in recent years from the new EU Member States. A large proportion of these workers are working in low-paid jobs. However, there is no evidence that their arrival has had a downward pressure on pay in the UK. Migrant workers were found to be more at risk of being underpaid or having excessive deductions from pay made by their employer.

4. Wage formation within the IT sector

Please describe in detail the wage formation process in the IT sector in your country.

  • I] Please give the main features of the sector

a) Importance of the sector in the economy

This sector is significant in the UK context. It comprises roles such as webmaster, web developer, web designer, web security specialist, helpdesk technicians, systems analysts, software engineers and user support staff. There do not appear to be any specific figures documenting the number of people in these roles, although all companies with an IT function will employ these types of employees, or have access to a service offering these functions on an outsourced basis.

b) % of the workforce in the sector

As stated above, there do not seem to be any figures documenting exactly how many people work in IT roles in the UK.

c) Main pay-related characteristics, such as: low pay, differences in pay between men and women and/or older and young workers, wage drift;

There are a range of information sources about pay in the IT sector. One of the most recent is an IDS report, published in June 2007 (“Pay for key roles in IT 2007”, IDS Pay Report 979, June 2007). This IDS survey is based on responses from 44 organisations in April and May 2007. Three-quarters of respondents operate in the private sector, across a range of industries, including pharmaceuticals, retail, utilities, manufacturing, IT, finance telecoms and electronics. Pay is set according to the norms in individual companies – either collective bargaining, or pay awards by company management. The IDS survey shows that there is a wide range of salaries for IT posts, which it states reflects the variety of types of organisations in its survey. One of the main determinants of pay level in this sector is whether the organisation is in the public or private sector – private sector organisations pay higher wages for IT staff in general. The IDS survey also notes that performance and skills are the key determinants for pay progression in IT roles.

One particular feature of this sector is the prevalence of self-employed IT contractors. The Association of Technology Staffing Companies (ATSCo) recently estimated that pay for IT contractors had risen by 11% in the six months to January 2008. This upward trend is being felt in the financial services sector in particular.

  • II] Describe the main characteristics of the sector pay decision process

In accordance with wage formation norms in the UK, pay setting in the IT sector is decentralised to company level. Paying “the market rate” is the most significant factor in wage formation for IT workers.

  • According to the most recent report from the National Computing Centre, released at the beginning of 2008, pay growth in the IT sector remains stable, with a median salary increase of 3.7%, a small increase on the previous year, and a rate that matches the national increase in average earnings reported by the UK government (Benchmark of IT Salaries and Employment Trends in IT, National Computing Centre, http://www.ncc.co.uk/). This report draws on the responses from 244 organisations which provided salary and employment details for 5,493 IT staff.

This report also found that the number of individuals receiving performance-related bonuses is increasing significantly, up 6% to 44%. The value of bonuses has risen from 7.5% to 8.3% of pay. Bonuses to employees in management positions were higher, averaging 17%.

a) Is the wage formation process in this sector shaped by institutions? If there is a collective bargaining process, how does it work? Eg:

  • at sector level only;
  • at sector level, which then provides a framework for company level;
  • at company level only

Who are the main actors?

There is no multi-employer bargaining in the IT industry in the UK. Bargaining is carried out at company or establishment level, with a trade union if one is present, otherwise in direct negotiations with the employer.

b) Specific issues : upward pressures on pay such as wage competition between firms, the effects of a tight labour market, and using pay as an attraction and retention tool, the effects of migration on pay, the effects of the presence of multi-national firms within a sector and whether comparisons have been made between the pay offered by multinationals and local companies

The labour market for IT staff had experienced a slump during the first few years of this decade. However, it would seem that the labour market has now recovered and there are some upward pressures on pay, such as the increasing number of major mergers and acquisitions that require specialist IT professionals to manage systems integration. According to the Association of IT staffing Companies, this lead to an increase in average pay of 17% between 2005 and 2006.

A generally tight labour market for IT specialists and the ensuing recruitment and retention issues have also been exerting an upward pressure on pay. One result of this is that companies have begun to look overseas for their IT specialists – work permits for overseas IT professionals rose by around 40% in 2006. These foreign workers may initially exert a downward pressure on pay, although this effect is thought to be unlikely to be sustained. According to figures from ATSCo, the number of foreign IT workers entering the UK rose by 32% in the 12 months to February 2007, with 79% of these workers originating from India

Other downward pressures on pay include outsourcing, although IDS suggests that companies are now beginning to bring IT services back in-house.

The IDS survey found that there were differences in the pay offered by public and private sector companies – for example, the median midpoint salaries for helpdesk technicians in the private and public sectors were £21,750 and £17,681, respectively.

The above-mentioned report from the National Computing Centre also states that: “The repercussions of the credit crunch are unknown, but more and more organisations are doing business on-line so demand for web-related skills is buoyant. The public sector is likely to find shortages painful as the pressure to limit wage inflation is high”.

  • III] Analysis on trends and views of the actors

a) Are there any major differences between this sector and the rest of the economy in terms of wage formation?

Pay is set at company level in this sector, in keeping with the norm elsewhere in the economy. The IT sector is subject to specific market and labour market pressures that other sector are not, such as an increasingly tight labour market at present, and a trend (albeit now declining) to outsource IT functions.

b) Are there any noteworthy trends at company level, such as an increasing individualisation of pay setting?

There is widespread use of the payment of bonuses for IT staff – the IDS survey found that two-fifths of respondents paid bonuses to IT staff, ranging from 3% to 30% of basic salary, although most paid between 3% and 10% of basic salary. Some companies only pay bonuses to staff in senior roles. Just over a quarter of respondents to the IDS survey said that bonuses were based on company performance – a further quarter said that they were based on both company and individual performance.

An IRS survey of IT staff found that the most common way of rewarding IT staff was a combination of an across-the-board pay rise and a performance-related award, such as a bonus. None of the companies in the IRS survey used incremental or service-based pay rises (E-pay review 2002). The most popular pay practices were awarding individual merit pay, “broadbanding” (compressing many pay grades into four or five wider bands), and linking pay levels and salary scales to a market benchmark. The survey found that share options were the most popular long-term incentive for staff.

c) What are the main views of the social partners in this sector on wage formation?

The CBI believes that wage formation in the IT sector is more decentralised and dynamic than in the rest of the labour market, due to demand for the types of skills that IT professionals offer. Many of the people working in the IT sector work on short-term contracts rather than open-ended contracts and this is often coupled with comparatively high wages. In addition, company demand for IT professionals can drive up pay. IT professionals usually negotiate their own wages, which are usually high compared with pay for other positions in companies, particularly if they are working as self-employed IT contractors. The CBI also noted that although pay is comparatively high in this sector, the sector is more sensitive than most to economic downturn.

A spokesperson for the trade union Unite, which organises workers in the IT sector, noted that as there is no sectoral bargaining in the UK in the IT sector, wage formation can be quite complex. For example, within one multinational, pay might be set by collective bargaining for one group of employees, due to the fact that, as a result of mergers and acquisitions, this group has moved across from another organisation with a collective bargaining tradition, while for another group of employees in the same organisation, it is set by individual performance-related pay. He also noted that performance-related pay systems can be characterised by a lack of transparency and could theoretically mask issues connected with equal pay and work for equal value. In terms of trends, over the past few years, there have been a range of pay outcomes for workers in the IT sector, with some having received substantial pay increases, while others (usually those not covered by collective bargaining) might have received no real pay increase for the past three to four years. He also noted that although pay can be higher for self-employed contractors in the IT industry, employed workers are often better off overall, as they enjoy a range of additional benefits, such as holiday pay and sick pay.

d) Are there any positions of the authorities on the sector’s wage policy?

None found. The government is not involved in pay setting in the IT sector in the UK.

5 Views of the national centre

Wage formation in the UK is highly decentralised, taking place predominantly at company level, particularly in the private sector. The past decade has seen significant changes in the area of low pay, following the introduction of the National Minimum Wage. This has engendered much debate about the nature of low pay, the issue of regional variations, and the potential knock-on effect of the minimum wage on pay differentials throughout the economy and the effect on the labour market, particularly in the case of young people and workers in low-paid jobs. Few would argue that the NMW has not been a success, in that it provides a pay floor for millions of people in low-paid jobs and does not appear to have had a detrimental effect on the labour market. Overall in the UK, pay appears to be keeping pace with inflation and there have been relatively few strikes over pay in recent months (excluding the teachers’ strike) – most industrial action has been over other issues, such as pension provision. Nevertheless, there has been some pay-related industrial unrest in the public sector, centring on the government’s policy of public sector pay restraint.

The IT sector is subject to largely the same wage formation process as the remainder of the private sector in the UK, and pay is significantly influenced by the market rate for jobs, alongside demand for particular skills. Pay in this sector is potentially sensitive to fluctuation, depending on factors such as the market situation and migration of skilled IT staff to the UK.

Overall in the UK, there is now some evidence that pay growth is accelerating and pay monitoring bodies will be watching developments closely over the coming months, in the context of the rising cost of fuel and food, which is contributing to an overall increase in the cost of living.

Andrea Broughton, Institute for Employment Studies

Useful? Interesting? Tell us what you think. Hide comments

Add new comment