Long reads

How much should you really pay your people?

11 Jul 2019 By Robert Jeffery

When pay rates fluctuate wildly, salary bands can bring much-needed structure to your organisation. But setting and implementing them is far from simple

There are many potential flashpoints in the employee life cycle. But none of them are quite as guaranteed to push the buttons of staff and managers alike as the annual salary review. No matter how standardised the outcome or professional the process, everyone takes pay personally. 

David Wreford, a partner at pay consultancy Mercer, has helped dozens of organisations make the ordeal less painful, but admits it can never be a breeze. He tells the story of a business he worked with, which was so resigned to the idea that its salary reviews would turn into a disaster, it provided employees with the details of its grievance procedures during the course of the discussion.

Sadly, such fatalism is far from unique. From executive remuneration to the national minimum wage, via the interminable rounds of pay bargaining that bedevil the public sector, everything to do with setting salary – perhaps understandably – involves conflict. 

And yet for something so important, we are decidedly unscientific in our approach, frequently content to rely on instinct – or, worse, prejudice – rather than evidence when it comes to makingdecisions. It is a process crying out for rigour, and salary bands, whether simple ‘spot rates’ or multifaceted narrow-graded structures, remain the best way to remove the subjectivity.

Though the popularity of specific methods may fluctuate, the 2017 CIPD survey Reward Management: Focus on Pay found almost half of employers were now using some form of base pay structure that sets out different levels of role and accompanying ranges of salary. 

It is likely more have signed up since, with the gender pay reporting regime leading to a resurgence of interest in objective, explainable salary systems and – perhaps more profoundly – the advent of websites such as Glassdoor and commercial services like PayScale encouraging employees to ask questions about their pay relative to the market and their current or potential colleagues.

“It’s become a seller’s market for labour and people are familiarising themselves with what organisations are offering,” says Stephen Perkins, emeritus professor at London Metropolitan University and editor of Reward Management. “Unless employees feel organisations have thought reward through and made a strategic decision about it, they are increasingly likely to go elsewhere.”

Most of all, whether driven by transparency, gender pay – and the forthcoming ethnicity pay requirements – or just a general desire for fairness, salary bands are a reaction to the pay inflation and resentment that can arise when managers are left to make decisions unchecked, free to exercise bias. 

For that reason, among others, pay structures that develop organically are often simply inoperable, with formal intervention required to ensure fairness and alignment to market rates. “Organic can work for small organisations, which can have exact spot rates and spot ranges,” says Charles Cotton, senior performance and reward adviser at the CIPD. 

“It can also work for a larger organisation that only has two or three layers, like call centre worker and call centre manager. But if you have grown by acquiring other companies, for example, not having a structure can cause real problems when you want to move people across divisions or people start comparing themselves to colleagues. It means you are increasingly at risk from equal pay claims, too, if you cannot justify differentials.”

Cotton points out that salary bands are a means to an end, rather than an end in themselves. If they simply use longevity as a proxy for excellence, they may work against organisational improvement. 

“In the public sector, we’ve traditionally had salary ranges with pay spines. The assumption is that as someone becomes more experienced, they will contribute more to the organisation,” adds Wreford. “That doesn’t necessarily feel right at the moment. It means driving costs up in a low-wage environment, and it doesn’t feel like time served is the best way to evaluate contribution to the organisation. To my mind, it’s lazy.”

Indeed, businesses are becoming more sophisticated in their pay structures and how they justify progression decisions. While some still rely on the notion of job evaluations, others are moving beyond simple ideas of input and output. It’s about answering the age-old question of why one person is paid more than another for similar work, says Wreford.

“Historically, that has been a conversation about performance,” he says. “But most employees don’t understand performance and don’t believe what they’re being told about it.” What matters, in his mind, is competence, which is about the skills and knowledge you have and how you demonstrate them. That means both technical and professional capability, but also managerial ability and generic skillsets.

Devising ways to test such competence is highly contextual to the organisation and sector, which in turn explains why Perkins believes the market is shifting towards individualised salaries that reflect agile digital business models. 

While the public sector has pioneered narrow graded progression based on large numbers of different grades, others such as the services sector and manufacturing, prefer pay ranges that embed flexibility and encourage differentiation based on individual performance, he says. Meanwhile, a quarter of businesses operate broadbanding, where the difference between the best and worst paid employees in the same role can be as high as 100 per cent.

CIPD research backs the idea that organisations are shifting towards narrower grades, seeking greater simplicity and tightening accountability. The consequences of not doing so can be seen at the BBC: the broadcaster ostensibly has 11 pay grades, but there are other management grades that fall outside this. On-screen presenters, meanwhile, may be employed through other forms of contract (including self-employment) that mean they are not subject to salary bands. And despite this complexity, in 2018 it was revealed that 1,500 staff – a little under 10 per cent of the permanent workforce – were paid more than their stated grade.

Tom Hellier, head of reward and benefits at consultancy Korn Ferry, says this is not uncommon. “Some of the worst cases I’ve seen are where there’s too much structure. I worked with a national charity with 128 pay ranges in place. The administrative burden in keeping that all in place was enormous, and in some cases what they were doing was inexplicable.”

The question, then, is how to untangle a complicated structure or – in the case of the half of organisations the CIPD says have no salary bands – how to introduce order into relative chaos. The starting point, says Hellier, is understanding the value of different roles to the organisation, regardless of how well remunerated they are. 

From there, it’s a case of spotting patterns – “the degree of commonality or difference in absolute pay levels from top to bottom, and where clustering might take place, as well as the extent of any pay overlaps.” Bringing these pieces of information together, he says, can identify where roles might be overpaid or underpaid, or where there might be an equal pay risk. Only then can job evaluation or external benchmarking add structure to this insight.

Even so, there are nuances to consider. Are you really prepared to cut salaries if you can demonstrate staff are overpaid? BBC presenters such as Nicky Campbell and Nick Robinson, as well as easyJet CEO Johan Lundgren, all reduced their pay in the interests of gender equality, but most employees not subject to such a degree of public scrutiny would be left deeply unmotivated by such a move, even if it could be legally justified – the theory of loss aversion means we are proportionately more affected by having something tangible removed than by never having it in the first place. 

And then there are the inevitable exceptions to any pay structure: if you really cannot secure a critical employee without outpaying the market, are you prepared to stick to your guns even if it might hinder you operationally?

Samantha Knight, director of HR at Morgan Sindall Property Services, found it necessary to make ‘red-circled’ exceptions when she introduced its first pay structure. But most roles, she adds, fitted comfortably into bands, and managers have been delighted: “We had nothing in place before – now, managers are pleased they don’t have to make these decisions because they have a grounded, factual basis [for salaries].”

In any case, greater transparency will force employers’ hands – and that isn’t always a bad thing. “We worked with an organisation that went completely transparent,” says Wreford. “Anyone could go and see everyone else’s performance record and pay history. The value was that transparency drives a high performance culture. Low performers don’t stick around because they’re subject to scrutiny.”

Organisations are instinctively resistant to such openness, but it is becoming commonplace. The CIPD found 54 per cent of the UK employers it surveyed provided at least some degree of information to employees about their colleagues’ pay, ranging from broadly aggregated averages (20 per cent) to exact individual information (13 per cent). 

They often do so not just because Glassdoor is eroding secrecy, but because as soon as you have any pay structure in place it becomes harder and less justifiable not to share at least some information.

Evidence suggests it is no bad thing, anyway. A study conducted by Harvard Business School and UCLA found knowing how much managers in their pay structure took home led employees to work harder – although discovering they earned less than immediate colleagues had the opposite effect.

Perhaps the key to any transparency is communication. Cotton explains the public sector has been very clear for many years about how and why promotion and pay decisions take place, and this largely works well, though it can lead to ‘grade inflation’ – where additional roles need to be created to reward those who have hit the limit of their present earning potential.

“More and more pressure is being put on line managers to explain to employees how reward decisions are worked out,” says Perkins. “The concern from the HR community is that managers are struggling to sound confident, let alone competent. Organisations, if they’re serious, have to educate their managers and help them be better communicators. 

“On the other hand, as long as people understand the basis on which decisions are made and are encouraged to make the right kind of comparisons, hopefully they will be happy.”

Knight says she has found explaining the rationale behind decisions has made Morgan Sindall employees comfortable with its new pay grades – even executives who believed their roles would be hard to benchmark, because they were nuanced and technical, have been reassured by being involved in the process.

A significant danger in not cascading the right messages is an over-reliance on base pay at the expense of total reward. If employees only compare cash, they may believe they would be better off elsewhere. If you can show the development, flexibility and benefits you offer are worth consideration, you are more likely to encourage loyalty. 

Such a conversation is best handled through the development process, adds Zara Loughrey, reward director at Bupa. Her organisation operates market-based pay grades aligned closely to performance, but she says performance conversations are the place to explain the role of base pay, bonuses and other opportunities. 

This is harder now because the way we reward is less linear. “We have to make sure people know how to progress based on service or achievement,” says Loughrey. “There used to be clear steps, but the picture is less certain now – and telling people they can progress based on performance, skill and competence is a tougher message [than straightforward longevity].”

The system also needs to be flexible, she adds, because “you can have new and disruptive employees making a huge contribution in a very short space of time and you have to be able to recognise that” – a process aided by talking to recruiters all year round about market conditions, rather than relying on annual benchmarking surveys.

But will such considerations matter in the long run? Eventually, say technologists, we will realise the dream of feeding data into a virtual black box, which will spit out an objective and inarguable amount each employee should be paid. That will change dramatically what organisations require from reward professionals, says Wreford, turning them into coaches and interpreters of data.

Already, organisations – particularly in the tech field – are prepared to radically experiment with ideas such as deciding pay on a team basis or voting on salaries. Hellier suggests businesses will soon allow employees to calibrate how much they take home in base pay versus bonuses and benefits, while the advent of agile organisations with fluid hierarchies will mean the only effective reward structure will be one aligned strictly to performance rather than job grade. 

But one thing is likely to remain certain, adds Hellier. “We will see more machine learning tools when it comes to job evaluation and performance-based pay. But will people be happy with what it tells them? Absolutely not.” 

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