Why is it important to get pay levels right?

Hugh Margesson, Senior Manager, People Management, Smith and Williamson:

This is an important area and everyone has a strong sense of their own worth and their own value and this is informed in part by internal relativity. That is how people feel that they relate within their own organisation to the people that they regard as their peers and there needs to be a sense of fairness there. Externally people are relating to what they perceive as the market rate for the work that they are doing and that may be informed by their own experience through recruitment or their previous working experience. That sense of value contributes to somebody's motivation and it comprises a number of factors in terms of reward. Firstly salary, there may be bonus incentives but also the benefits that you're able to provide and of course the status within the organisation as well. It's important to get those right both in terms of attracting the right sort and quality of people that you need for your business but also for retaining them.

What are the key points when reviewing my pay levels?

When you are looking at pay levels, you really need to keep three factors in mind. The first of these is position, that is how does the pay match up to the market rate and the best way to find this out is through some sort of market benchmarking and there is a lot of information and a lot of surveys that are available for different sectors to give you an idea of rates. In addition to that you can look at advertisements and contact recruitment agencies who will be able to give you an indication of what the appropriate rate is. Usually you will find that the published rates are an average, or more precisely a median and you can chose to pay where you feel is appropriate to attract the right people and in order to retain them.

The second point to bear in mind is around progression, that is how somebody's value will be growing as they work within your business and you can chose to structure your pay system so that people perhaps stay on a spot salary which then changes periodically through market benchmarking. Or you can put people into a salary range where they may progress in terms of pay increases through experience and demonstration of their competency in their role. Finally, the third point to bear in mind in reviewing pay, is people's performance and some sort of review process is important there, of course it doesn't have to be an appraisal but you need to know how people are performing against expectation and you can chose to reward them in a number of different ways for that.

How can you link pay to performance?

Well there are a number of ways of linking pay to performance, perhaps some of the best known are bonus schemes, merit awards, share options and performance related pay. Whichever approach you go for, you must be absolutely clear about what you are expecting from people in terms of performance and it's worthwhile spending time early on in the design of your pay system to be absolutely clear that those links to performance will work. You'll also need to be clear that you're looking at somebody's overall contribution to your business so whilst there might be quantitative targets that you've set, whether that's in terms of finance, production or sales you also need to be very clear about how you expect people to behave and contribute effectively to your business. Sometimes that is going to be a matter of defined performance standards but that's a fairly formal way of going about it. The most effective way is the role model, that you and the other senior people within the business can provide for your staff and more junior managers.

What should employers be thinking about in terms of pay review?

Clearly we are in tough economic times and we are all aware of pay freezes in parts of the private sector over the last couple of years and certainly in the public sector now. Any pay award of course is going to be dependent upon affordability and many businesses that we're working with are looking at a variety of approaches to this. Current pay data shows that pay awards in the private sector are running at about 2% this year, so that gives you an indication of the sort of awards which people might be expecting and a number of our clients are aiming their pay awards at about that level. There are of course options for providing non-consolidated payments and particularly if you are wanting to target pay increases at high performers when affordability is going to be a key issue.

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