There are many ways to manage a pay review budget and approach pay progression. However, before we start thinking about the pros and cons of those different approaches, it is important first to be clear about what Base Pay is for in your organisation.
The main key question to start with is whether you want to differentiate base pay or treat everyone the same. There are pros and cons to both these options. Treating everyone the same, and having fixed base pay rates for each role where everyone progresses at the same rate is equitable and transparent but may not be the best way to motivate employees.
If the decision is to differentiate base pay, then the next question is how. The two options are by competency and by performance.
Varying base pay to reflect competence can feel better for those who have a higher level of competence and therefore contribute more to the organisation. It can also provide a way to progress pay and motivate employees to increase their level of competence. The challenge then comes in ensuring the assessment is objective.
Alternatively, differentiating based on performance might be best for your organisation. Whether this is the right way to go may depend on whether you have other elements of your reward package that reward performance. When deciding what base pay is for, it’s important to also decide what other elements of the package are for. You don’t want to end up paying out twice for the same thing. For example, increasing base pay in reward for high performance and paying out an annual bonus which is based on performance.
One analogy we use with clients is the distinction between how you pay for class vs form. If you consider a footballer, setting aside their eye-watering salaries for a moment, their salary is based on their class, i.e. their level of skill, experience, and track record. The annual bonus rewards their form, i.e. how they perform on the pitch during that season. For organisations that don’t have a bonus in place, it might be that “form” is rewarded in other ways such as via a recognition scheme.
It is important that as well as being clear on what base pay is for, to also be clear on how it fits into the wider package.
Another consideration is whether you prioritise internal equity or equity with the external market, or somewhere in the middle. Again, this can shape your approach to pay review in terms of whether you are wanting to move towards an external market stance which might be to pay at the market median or upper quartile. Or, are you wanting to bring employees towards the mid-point of your pay ranges, therefore prioritising internal equity?
It is also worth asking yourself whether there are any business-critical skills you are prepared to pay more for to attract and retain talent, therefore needing to differentiate between certain roles or functions.
There is also the question of the length of service and whether that should play a part in your strategy. Typically, we are seeing organisations reward for other factors and moving away from increases explicitly tied to a length of service. However, for some organisations, particularly those who don’t want to differentiate base pay, incremental increases link to the length of service enable an organisation to be transparent and prioritise internal equity. That said, like with any form of pay management it’s important to ensure compliance with equal pay legislation and creating too big a difference in pay based on any factor including length of service may result in equal pay risks.
A final question should also be about the capability and confidence of your line managers. Aspiring to reward based on performance or competency requires strong performance management processes and for managers to be capable of effectively assessing performance or competency.
When setting your reward strategy and defining what each part of the reward package is for, it can often be the case that where you are now and the current practices and policies can be different to where you might want to be in the future. Being clear on whether there is a difference will help define your approach to pay review. If you currently don’t differentiate base pay but want to move towards differentiating based on competency levels, being clear on what that gap looks like can help you plan out the steps to get to where you want to be.
Pay review is a challenging process, done under the added pressure of an impending payroll cut off deadline, making step changes rather than a significant change in one go can prevent adding too much pressure to an already challenging time. For example, if the goal is to differentiate based on competency, the first step might need to be getting a competency framework in place and training managers to establish confidence and capability in assessing competence before linking it to pay increases.
In summary, reward packages look different from one organisation to the next, however starting with clarity around what base pay is for will ensure that you maximise the impact of your pay review budget. If you’d like to talk in more detail about your options for pay review, I would be pleased to hear from you. Please email me (Cathryn.email@example.com) or call our office on +44 (0)20 3457 0894.