Oxford University's bid to award a pay rise to all its staff has been turned down by the Higher Education Funding Council for England.
The decision has angered trade unions. Malcolm Keight, assistant general secretary of the Association of University Teachers, said: "The vast majority of staff in universities are losing out because of the funding council's insistence on funding special initiatives."
The university wanted to use its share of the extra £330 million announced by the government last November for pay to establish an Oxford weighting.
David Owen, director of the staffing and administrative services division at Oxford, said: "The pay rise would not have been huge, but we wanted to establish the principle of an Oxford weighting. We argued that Oxford is a very expensive place to live and we needed the weighting to retain staff."
A spokesperson for Hefce said: "When the then education secretary (David Blunkett) announced this extra funding he made it explicit that it was 'something for something'. The Hefce guidance on this was clear that human resources strategies had to be submitted that rewarded staff performance, addressed staff training and addressed retention and equal opportunities issues."
But ministers signalled that institutions were free to transfer the money directly to pay packets.
Mr Keight said: "The money made available to Hefce was fought for by trade unions, employers and a number of other bodies. It should be used to retain and recruit all staff, not just specific categories."
Oxford submitted a back-up bid that was approved in full by Hefce. Oxford's human resources strategy was one of the few to be given "full" rather than "emerging" status by Hefce. The university was awarded £10 million over three years.
The university has used the money to provide additional funding for distinction awards for professors and readers; additional funding for recruitment, retention, and reward payments for support staff; new career development fellowships to increase the diversity of candidates for particular posts; and to research new sources of applications and develop strategies to attract them.
"These initiatives will only really be successful if there is long-term funding," Dr Owen said. "We hope for further money after the three years is up."