HR must prioritise engagement, leadership and talent retention in 2013 to combat sluggish salary increases and poor morale, suggests Hay Group research.

The survey found many HR professionals were worried current reward and talent initiatives were off kilter. One in five of the reward specialist respondents believed their organisation’s incentive programme did not deliver, while half thought their talent retention strategy missed the mark.

As a result, a third of organisations plan to change their talent strategy in 2013. Similarly, half the organisations surveyed aimed to take a look at their pay and reward systems.

But benefits will only get you so far. The research also identified the importance of strong leadership as a key factor in keeping staff engaged and performing.

These changes to benefits and talent strategy were necessary to offset the fragile economy. Salary increases will lag behind inflation in 2013, the research predicted. While three-quarters of organisations anticipate making salary increases, over half of these will be 2 percent and a third will be 3 percent to 5 percent. But as the Consumer Prices Index stands at 2.7 percent, any rise will be swallowed by higher costs.

Three out of five reward specialists worry the full impact of the recession has yet to hit their organisation, while 68 percent believed that economic uncertainty has affected employee morale.

But countering the doom and gloom, the survey reported plenty of evidence to support growing business confidence. There was a significant drop in the number of organisations expecting to make job cuts this year compared to 2012 and a marked rise in the number of firms expecting to meet or exceed bonus targets. The number of companies implementing pay freezes also fell from 18 percent in 2012 to 8 percent this year.