Vice-chancellors are spending resources earmarked for staff pay on peripheral and potentially discriminatory human resources initiatives, according to a survey by the Association of University Teachers.
The AUT has warned that the £330 million of additional funding "to support increases in pay" announced by ministers last year is being "sidelined" into management systems and institutional initiatives rather than being spent on improving pay and tackling inequalities.
The AUT's survey of universities' human resources strategies also found that where the money is spent directly on pay or perks, it is being spent on potentially discriminatory one-off payments.
Andrew Pakes, spokesman for the AUT, said: "The survey confirms our worst fears about how money offered to the sector to tackle pay inequality has been sidelined."
The then education secretary, David Blunkett, announced the extra funding in November 2000 - £50 million in 2001-02, rising to £110 million in 2002-03 and £170 million in 2003-04 Mr Blunkett said. "This will be a something-for-something reform to help institutions to recruit and retain the key staff they need... and help modernise management and reward systems, on top of any pay increase which universities negotiate."
Ministers signalled that institutions were free to transfer the money directly to pay packets and hinted that perhaps they should.
Institutions had to submit human resources strategies to the Higher Education Funding Council for England to receive shares of the cash. Strategies were designed to address priorities, such as rewarding staff performance, training staff and addressing retention and equal opportunities.
The AUT's survey of 11 institutions' strategies found that half of them showed that the amount of money dedicated to staff development and training was higher than that earmarked to tackle equal opportunities. More than half the institutions planned to introduce job evaluation and several said they wanted to introduce performance-related pay.
The AUT was concerned that more than half the institutions planned to introduce "market supplements" to help recruitment, including discretionary salary payments and discretionary perks such as private health care.
Mr Pakes said: "The strange mix of discretionary payments and financial incentives on offer smacks a little too much of the secretive administrations of on older era. It is misplaced to believe that pay inequality can be diminished by the same discretion that bred the gender pay gap in the first place."