Less pay, less work: but could it be a blessing in disguise?

Cuts hurt, but some workers and bosses are pulling together to save jobs. By Richard Northedge

First pay rises gave way to a freeze. Now, as companies cut wages and salaries, freezes look the generous option. Sometimes the cuts are blatant, like the 2.6 per cent reduction in remuneration agreed by British Airways' pilots last week; sometimes they are more subtle, like American Express's suspension of pension contributions for UK staff. But, however you look at it, pay cuts are increasingly the order of the day.

For the self-employed, from consultants to taxi-drivers, pay cuts are a direct product of the recession. Just as business boomed in the good times, it dries up when the economy slumps. Lower demand means less work, and cutting rates can sometimes result in a double cut in pay rather than a boost to business.

But for an increasing number of people who thought they had safe jobs, taking home less pay is an outcome of the recession too. Overtime has gone, bonuses are cancelled – even at the BBC – and short-time working is a half-way stage to unemployment.

Honda staff were put on standby on reduced wages this year when vehicle production was halted, and other motor manufacturers have followed. ThyssenKrupp Tallent, which makes components for cars, has cut its workers' wages by 5 per cent for seven months. At many companies the annual pay-rise negotiation has turned into talks about cutting basic rates. For the first three months of this year, official average weekly earnings were showing a fall on 2008 levels, partly reflecting the axing of bonuses in the financial sector.

Ken Mulkearn, who produces Income Data Services' (IDS) pay report, says nearly a third of income deals are currently frozen. "Freezes remain a key part of the picture, especially in those sectors that are struggling, but most organisations continue to award increases – though mainly on a lower basis than in previous years," he says.

"Cuts in basic pay remain rare, with those that we have monitored confined to the hard-pressed motor industry. Most of these reductions are temporary and aimed at securing jobs."

That is why the suspension of pension payments to white-collar staff at an American-owned credit-card giant took cuts into new territory last week. Unlike companies that have taken contribution holidays from final-salary schemes that do not affect the ultimate pensions, American Express's move will directly affect the benefits of its 6,000 UK workers.

The employees' money-purchase pension scheme has already been hit by the fall in stockmarket values but the company has suspended new contributions worth at least 3 per cent of salary, or 6 per cent for staff who invest a similar sum. It is a significant pay cut, even if it is one that workers will not feel until they retire.

Most American Express staff are not union members but the company's move has angered the TUC. General Secretary Brendan Barber says: "There is a nagging suspicion that some firms are using the current recession as a convenient excuse to adopt a slash and burn approach to pensions, adopting exactly the same short-term, profit maximising mentality that gave us the financial crash in the first place."

Other financial organisations have adopted other ways to reduce pay. Barclays has closed its final-salary pension scheme, other banks have cancelled or deferred bonuses, and the Newcastle Building Society has given staff extra holiday in lieu of a pay rise.

Some 46 per cent of employers in banking, finance and insurance have changed their bonus schemes, according to a survey this month by recruitment group Harvey Nash, whose chief executive, Albert Ellis, says: "The recession has led to fundamental changes in the way employers recruit, motivate and develop employees."

In April, the key month for many employers' pay negotiations, the median settlement dropped to 2 per cent, just two-thirds of last year's level, according to IDS. Freezes were the main cause of the drop, says Mr Mulkearn, accounting for a quarter of settlements. Management pay rises fell even more sharply, from 2.4 per cent at the start of the year to just 1 per cent by April.

But a survey for the CBI, of more than 700 firms employing three million people, found 55 per cent plan to freeze salaries and wages in the next pay round and almost all other companies will agree only modest rises. One of the most dramatic responses, has been at BT which has offered its staff a year off work if they take a 75 per cent pay cut, with the remaining salary paid up front.

In previous recessions, price inflation has been high – well over 20 per cent in the 1970s and 1980s. Settling for a pay rise of, say, 10 per cent then was a substantial reduction in real pay but still left workers with what looked like an increase. This recession is unique because inflation is negligible or negative. Official figures last week showed the annual change in the retail prices index has tumbled from a 5 per cent rise to a 1.6 per cent fall in less than a year. A pay freeze is effectively a rise therefore, and even a small fall can leave workers better off.

However, most people accepting a cut simply see it as a better alternative to losing their job entirely.

The challenge for government is whether, now that pay cuts are common practice in the financial sector, they can be imposed on public-sector workers. Steve Bundred, head of the Audit Commission, which monitors government expenditure, recently suggested a one-year freeze to save £5bn on the state's £150bn pay bill.

With inflation low, he said, a pay freeze would be a pain-free way to cut public spending. Chancellor Alistair Darling showed no enthusiasm for upsetting state employees, however, including NHS workers who are on a three-year deal that sees pay increase each year.

Private industry is thus bearing the brunt of cuts in both hours and pay rates, but private-sector employers such as BA do have a way to soften the blow. Its 3,200 pilots last week agreed almost unanimously to work longer hours and accept a 2.6 per cent cut in pay, saving the troubled airline £26m. But in return, BA agreed to give them £13m of shares in two years' time – equivalent to about 1 per cent of the company's current value. Hopefully by then British Airways' troubles will be over and the share price, which has fallen by 80 per cent in less than three years, will be recovering. The company's 14,000 cabin crew, who are in dispute with BA over job cuts, asked why their own offer to accept a similar pay cut has been rejected.

The chief strategist at stockbrokers Brewin Dolphin, Mike Lenhoff, welcomes BA's example of offering shares to compensate for pay cuts. "Providing equity in lieu of pay is very desirable. It aligns the thinking and motivation of the staff with the people who own the business and that's a good thing. It helps people to stay focused on productivity. Although you can't spend it right away, you're trading off current for future income."

Not only is offering equity instead of cash a saving for the employer, Mr Lenhoff sees BA's plan as a way of encouraging saving among staff, even if they are risking their wealth alongside their income. "There are more pros than cons," he says. "People do not like to take pay cuts but they'd rather do that than lose their job."

The BA pilots' deal opens up the prospect of more firms offering equity to produce immediate cost savings from lower wage bills. John Cridland, deputy director-general of the CBI, says: "While pay and recruitment freezes should disappear as the economy recovers, the spirit of flexibility and the willingness of many staff to engage positively with employers on these issues will hopefully be a more permanent benefit to the UK economy."