(Reuters) - Royal Mail Plc (L:RMG), Britain's former postal monopoly, said it reached a one-year pay deal with the Communication Workers Union (CWU) that would increase workers' base salary by 1.6 percent.
The CWU will recommend that its members accept the offer for the year 2016-17 in a ballot, Royal Mail said in a statement on Wednesday.
The 500-year-old company, whose red post boxes decorated with the Royal Crest are a feature of landscapes across the UK, said it would begin talks with CWU on a range of issues.
Royal Mail did not give any clarity about its pension contributions, a factor that will impact its cash flow.
Cash flow has been a point of contention for the market, and was pulled to the forefront after Royal Mail warned last month that it faced slightly higher than expected costs to modernise its operations.
In an extremely competitive domestic postal and parcel market, Royal Mail's prospects hinge on its ability to cut costs and modernise operations to gain a larger share of the parcels market in light of declining letter volumes.
It has also been hurt by the loss of some business from key customer Amazon.com Inc (O:AMZN), which recently started its own delivery network. Other competitors such as UK Mail Group Plc (L:UKM) have added extra capacity, threatening its dominance at home.
Royal Mail said on Wednesday the wage offer was for all employees represented by CWU, including those of its Parcelforce Worldwide service, and would apply from early April.
The company's shares closed down 2 percent at 529 pence, underperforming London's blue chip FTSE 100 index (FTSE).