The Hay Group report, Reward in 2012, is based on forecast data from reward professionals in 180 organisations, representing over half a million UK employees.
Pay forecasts for 2012 reflect "faltering confidence" among UK businesses. Two thirds of respondents believe the worst of the recession is not over for their organisation. Almost a third expect to miss performance targets this year.
Only 7% believe the worst of the crisis is over. By contrast, 61% of firms experienced an upturn in business performance last year.
Almost a third (32%) of firms expect below target performance this year - up from less than 23% in 2011.
As a result of faltering business confidence, close to half (43%) of organisations report pressure to decrease pay in order to control costs.
Despite this, the strong majority (85%) of organisations actually plan to increase pay in 2012 - but at a rate well behind inflation.
Three quarters (75%) of private sector organisations, and some 90 per cent of public sector organisations, will increase pay - by a median of 2.8%. The Consumer Price Index (CPI) currently stands at 4.2%.
And as inflation continues to erode take-home pay, organisations report a detrimental impact on workforce morale. Over half (51%) of respondents agree that uncertainty around pay has resulted in a downturn in employee engagement.
Adam Burden, reward information consultant at Hay Group said: "As ongoing instability hits business confidence, a continued squeeze on pay is inevitable. Our research reveals the demoralising effect pay uncertainty is having on employee morale."
