There are number of different ways that you can distribute your pay review pot, and the right method for your organisation can depend on many factors. These are a few of the most common options.
Blanket Increase
Many organisations choose to simply award a blanket, across the board increase to their employees, often aligned to external measures such as the average pay award seen in their sector or aligned to cost of living increases. The advantages of this approach are that it is consistent, fair, and easy to implement, however it lacks flexibility to be able to differentiate pay awards according to employees’ performance or competency.
Blanket Increase plus discretionary pot
To build in a layer of differentiation some organisations reserve a discretionary pot from the overall pay review pot to reward individuals for high performance or high competency. Typically how this works is that individuals who have met the expectations of their role would receive the standard, across-the-board increase, while individuals who have exceeded expectations would receive an additional increase on top of this. Again this is relatively simple to administer while allowing organisations to recognise high performers or high contributors. However, introducing any element of performance related pay means that the criteria for awarding an additional payment must be documented, clear, and transparent to managers, otherwise there may be an increased risk that decisions for awarding a discretionary pay increase may be influenced by unconscious bias and potentially lead to equal pay issues.
Pay positioning - external
Another factor to consider is how your pay is positioned against the external market, and organisations that have completed pay benchmarking are able to factor this into pay award decision making. For example, if an organisation has committed to aligning their pay policy to at least the market median they may wish to allocate a portion of the pay review pot to target any salaries positioned below this, with the affected employees receiving a bigger pay award than those already aligned with the market. This ensures that your pay review is working in conjunction with your pay policy while reducing the risk of attrition due to pay that has fallen behind the market expectations. However, this approach is of course dependent upon a thorough benchmarking exercise being completed for all roles using robust data sources.
Pay positioning – internal
A key part of pay governance and the distribution of your award pot is consideration around how pay is currently positioned internally within your organisation in relation to similar roles at similar levels. Typically this is managed through a pay framework with different pay bands or ranges that correspond to your internal grading system and organisations that operate a framework will want to ensure that pay review is conducted with this in mind. For example, where employees pay is positioned below the relevant pay band or pay range, organisations may wish to allocate a greater proportion of the pay review pot to address this. At the opposite end of the spectrum pay awards given to employees whose pay is positioned above the relevant pay range may be capped or given in the form of a non-consolidated award or lump sum pay payment which is not added to salary – this an effective method of managing pay which has become over inflated and prevents further inflation until such time that the pay ranges catch up with it.
This approach can also be overlaid with performance so that high performing employees whose pay is positioned below the pay band or is low within the pay band would receive the highest pay awards and conversely instances where pay is positioned against high against the pay band but performance is low would receive the lowest pay awards.
Another important aspect to consider is the range of salaries for employees at the same grade or in the role, are there outliers, salaries that are particular high or low compared to the majority and are there justifiable and documented reasons for this – pay review can be used as an opportunity to rectify inconsistencies in positioning of individual pay that cannot be justified and to mitigate against equal pay risks.
Not just an annual event
Just as we have seen organisations move away from the formal annual performance appraisal to more regular conversations around performance, increasingly we are seeing organisations move away from pay review being an annual event to more frequent, agile approaches. This may be in response to demands from the external market or to recognise employees with increased responsibilities or competency in their role – in these scenarios, it doesn’t make good business sense and will result in demotivated employees if pay is reviewed only once a year. That said, year round pay decisions should be conducted within the framework of your pay policy and based on robust data sources to ensure that they are fair and pay increases are given for the right reasons – by continually tracking these you can ensure that your policy is working as intended and using technology is by far the most effective way of doing this however it’s critical that this is managed consistently with oversight from HR or Reward.
If you would like to discuss your pay review processes and options in more detail, we would love to here from you. Send me an email (alastair.cole@innecto.com) or call me on +44 (0)20 3457 0894.
