Pay Structures – How Do You Ensure You’ve Got The Right Fit?

Pay structures or salary structures are the source of many debates across businesses in the UK. Why? Firstly, they define jobs through pay levels, grades or bandings. Secondly, the Ł value of the job is determined relative to:

• Internal equity – job evaluation or other method
• External market price – typically salary surveys
• Negotiated agreements, if appropriate e.g. recognised trades unions.

On top of this, the actual pay rate typically takes account of the job holder’s competence and individual performance. Getting this balancing act right is not guaranteed, though pay structures provide a sound framework to inform decisions on setting and progressing pay levels. However, like most reward practices, they need to align closely to your culture and values to effectively meet your goals.

What are the pros of pay structures?

• Set the framework that determines pay ranges for jobs and job holders
• Promote the implementation of consistent and equitable reward practices
• Provide a clear mechanism to manage jobs and people at different levels
• Easy to communicate and explain the relationship to HR policies, including career progression.

What are the cons of pay structures?

• Seen to be bureaucratic and to promote hierarchy in preference to flatter structures
• Provide limited flexibility to deal with pay ‘hot spots’
• Narrow pay structures can encourage people to push for higher pay bands
• Not essential in smaller organisation - those with less than 100 employees.

What are the priorities in designing your pay structure?

The key decision is to determine their purpose in your organisation. Will they help manage pay setting or define career paths? Ensure that you carry out a reward audit using a checklist of the criteria to achieve your goals, taking account of existing pay practices. Would ‘Job Families’ be more effective than graded structures to match your goals? Consider the context of the pay structure to assess the important of balancing internal equity versus external market pay. Also consider the requirements where a pay structure operates on a global basis.

Just News

Private sector pay agreements raise inflation fears. According to the IRS (Industrial Relations Services) pay settlements increased to 3.4% for the 3 months to October from 3.1%, partly due to the 6% increase in the Nation Minimum Wage last month. This is in sharp contrast to the whole economy where pay agreements remained at 3%. The RPI has reached an 8-year high of 3.7% and the Bank of England’s rate rose to 5% this month. As RPI is commonly used to determine pay deals, further rises may inevitably increase pressure on 2007 pay levels.

Head of GE enters debate on executive pay. As Executive pay levels continue to rise, Jeffrey Immelt, chairman and chief executive of General Electric and successor to Jack Welch adds his views to the debate. He argues that, in order to motivate staff and avoid excesses, pay differentials between the Chief Executive and the top 25 managers should stay as a small multiple. He argues that most of the compensation should be performance linked and multi-year contracts which lead to large pay-offs in the event of dismissal should be avoided. Do you agree or disagree? Click here to share your views.

Website of the Month

Each month, we bring you a quick round up of a website and as we enter the season of annual pay awards and settlements, this month we take a look at National Statistics online. Known as the ‘home of official UK statistics’, this website covers a huge array of statistics from economy to health, migration and the labour market in the UK.

The site provides essential data and commentary to help you build your pay review recommendation. It covers inflation rates, earnings and retail sales forecasts and a range of non-pay related data. Information on this and its sister site ‘the home of official labour market statistics’ is free and reputable.

7 Steps to Designing Your Pay Structure

Step 1 Once you have completed the reward audit and determined the criteria of your pay structure, define how jobs will be differentiated and then rank them into those steps or levels.

Step 2 Identify external pay surveys to benchmark against and compare pay rates of current job holders against these sources.

Step 3 Draw a scattergram of current pay rates to the external market and model a range of scenarios, such as different band widths and overlapping.

Step 4 Set these against your desired market position, such as median, and model other scenarios for comparison purposes like 60th percentile or upper quartile.

Step 5 Use the results from Step 4, taking account of your organisation’s culture and goals, to determine the number of levels that you will use.

Step 6 Depending on the number of levels, adapt the modelling to generate the number of levels and associated ranges and cost out the financial implications.

Step 7 Prepare materials ready to communicate and implement the pay structure.

This advice is provided as guidance only. If you would like some specific advice relating to your requirements, please call us on + 44 (0) 1367 710 618. 

Who else do you know who would be interested in receiving this newsletter? Just Rewards is free and anyone can subscribe by clicking here.