IDS HR Study 832, October 2006

Long-term pay deals

• Analyses why employers and unions have negotiated long-term pay agreements, and looks at their pros and cons
• Examines the length and sectoral distribution of long-term deals
• Explains how deals are structured and describes the types of formulas used to determine future pay rises
• Provides details of long-term deals in 61 organisations and industry agreements

In an extended period of low and stable inflation, long-term agreements have proved attractive to employers and trade unions alike. However, with inflation forecast to rise over the coming months, long-term deals may lose some of their sheen. In the public sector, for example, current pressure from the Treasury to peg pay increases to around 2 per cent and to limit deals to two years may see fewer long-term deals agreed.

This Study looks at the reasons why employers and unions sign long-term deals. For the employer, these can include: more predictable labour costs, savings in management time, improved industrial relations with the removal of the disruption of annual pay talks, and a stable framework to make structural changes. But employers also acknowledge potential drawbacks. The most significant is that being ‘locked-in’ to long-term deals may leave them vulnerable to sharp rises in inflation or a general downturn in the economy. Unions take a more pragmatic view weighing up the merits of long-term deals on a case-by-case basis.

We look in detail both at long-term deals that provide fixed percentage pay increases and those that link future pay rises to inflation, either through a simple link or via an inflation safeguard. We detail the pay increases already agreed for 2007 and beyond, and show how the Retail Prices Index remains the principal measure of inflation used by wage negotiators.