Pay Practices in the UK
This paper summarises the main approaches to pay system design being adopted by UK employers. It is intended as a critical guide for the non-specialist and, as such, seeks to explain why each of the approaches is used and its relative merits. The paper is divided into three sections:
Basic Pay
Variable Pay
Other forms of reward.
Basic Pay
In most organisations, 95 per cent of their wages bill is spent on basic pay. It refers to the core wages or salaries paid to employees. An important characteristic of basic pay is that it is almost always driven by the post or job which the organisation wishes to be done. In setting the value of a post, an employer may wish to take account of some or all of the following:
The value of this post in the marketplace. This market may be local, regional, national or international, or it may be occupational.
The value of this post relative to other posts in the organisation.
The extent to which the organisation has a system or hierarchy of posts within which post-holders may move or progress.
The extent to which the organisation wishes (or is required) to review basic pay in relation to the ‘cost of living’.
There are three approaches to basic pay which employers are using to help them manage remuneration:
1. Job Evaluation
What is it?
This is a mechanism through which the requirements of posts within an organisation are assessed against a number of dimensions, (e.g. job knowledge required, degree of financial accountability). These assessments result in a ranking of posts according to their relative ‘size’ or value to the organisation. This ranking may also result in the design of a grading system to order posts of related size. Job evaluation is frequently used to ‘benchmark’ jobs with those in other organisations, helping the employer maintain a position in the marketplace.
Who uses it?
Recent surveys suggest that between half and three-quarters of UK employers use job evaluation for at least some of their posts. In one survey, a further twenty per cent claimed that they planned to introduce job evaluation in the near future.
What are its advantages?
The main advantage of job evaluation is that it imposes a logical order on the ranking and positioning of posts within an organisation. In addition, it allows more objective ‘benchmarking’ with competitors and offers some protection against claims of unfairness – job evaluation can make pay structures more objective and ‘transparent’.
What are its disadvantages?
The key issue with job evaluation is the amount of time and effort it takes to design, administer and maintain. In addition, it can reinforce the notion of hierarchy, job levels and status when the organisation is seeking to flatten its structures. To this extent, job evaluation can be too rigid in times of change. Another problem with job evaluation can be that individuals and their managers can be tempted to ‘bend the rules’ to re-grade posts. In systems which equate management accountability with job size, it is not uncommon to find attempts to inflate the size of a job through ‘empire-building’. This can be made worse if managers fail to understand the distinction between the demands of the post and the attributes of the post holder.
2. Broadbanding
What is it?
This is a way of reducing the number of narrow grades in a pay structure into a smaller number of wider bands. It is based on the view that narrow ranges cannot reward people who have reached their range maximum but who are still performing well (even though no promotion opportunities exist for them). Broader banded structures are intended to provide greater flexibility to reward the acquisition of wider skills and competencies without needing to promote the post holder in every case.
Who uses it?
Research suggests that between 12 and 32 per cent of UK employers are using some form of broadbanding, though definitions vary. It seems more common among white collar staff.
What are its advantages?
As noted above, broadbanding can enhance opportunities for flexibility by drawing the boundaries between jobs less narrowly. It can be a useful tool in changing working practices to allow greater multi-skilling and cross-functional working. In addition, it can serve to help simplify previously complex pay systems.
What are its disadvantages?
The first problem with broadbanding is that many employers fail to implement it fully. Rather, they combine large numbers of grades into ostensibly broader bands, but continue to manage the structure as if nothing had changed. Another problem can be cost – broad bands can provide some posts with unexpected new ‘headroom’ with no apparent brakes on progression.
3. Job Families
Job families are a development of both job evaluation and broadbanding and will be briefly mentioned here. They allow an organisation to cluster jobs into groups where there is apparent functional synergy. For example, in a manufacturing business it is possible to categorise the majority of posts into the following four ‘families’:
1. The ‘Buying’ Job Family – all posts associated with purchasing raw materials and components;
2. The ‘Making’ Job Family – all posts whose primary purpose is manufacturing;
3. The ‘Selling’ Job Family – all posts involved in selling finished products;
4. The ‘Support’ Job Family – all posts performing a support role.
The attraction of such arrangements is that pay levels can be linked more explicitly to external comparators and that they can more readily reflect the career paths which individuals follow and aspire to. Research suggests that just over 15 per cent of UK employers have adopted a job family approach to base pay.
Variable Pay
Variable pay typically makes up around 5 per cent of the payroll. It is an ‘umbrella’ term which encompasses a range of approaches to distributing pay which ‘varies’ according to the contribution or skills of an individual or team. Unlike basic pay, variable pay is allocated to individuals or teams, and is usually intended to incentivise or reward contribution over and above the core requirements of the post. In many organisations, this has come to mean that a proportion of the payroll is allocated on a discretionary basis, often with line manager involvement. Variable pay can take the form of bonuses (usually not pensionable or consolidated into basic pay) or other awards such as increments, which move the employee through a grading structure by increasing their basic pay. The main forms of variable pay are summarised below.
1. Performance-Related Pay
What is it?
Individual Performance-related Pay (IPRP) is a generic term for a variety of approaches to awarding discretionary payments to individual post holders on the basis of their contribution. Among the most common approaches include pay awards for meeting work objectives or targets, for demonstrating work-related competences or a combination of the two. Awards can be given as non-consolidated bonuses or as consolidated progression within a pay structure.
Who uses it?
The evidence varies. For the most part, IPRP remains a white collar phenomenon with between 40 and 65 per cent of organisations using it for at least a proportion of their employees. Data on blue collar staff suggest a figure of 28 per cent. Its use has grown substantially during the last decade.
What are its advantages?
The primary advantage of IPRP is that it allows employers to target a proportion of their payroll towards those who contribute most to the organisation’s performance. It has been seen as a way of recognising that not all employees perform at the same level. In addition, some forms of IPRP are used as an explicit incentive to perform, with payment as a carrot. Some employers have also seen IPRP as a way of driving through cultural change by getting employees to focus on quality, customer service etc. Others have used IPRP to give a more individual focus to reward in the face of predominantly collective approaches (e.g. mediated through collective bargaining). It is this, and other characteristics which have made IPRP unpopular with Trades Unions.
What are its disadvantages?
IPRP has been one of the most controversial developments in pay since the war, especially in the public sector. A fundamental concern is its effect on motivation. Proponents of IPRP believe that, properly designed and managed, it can help motivate employees to perform in line with business goals. However, a considerable body of research shows that it is only rarely well-managed in practice and more frequently has the effect of demotivating employees. For others there is a concern that IPRP awards during periods of low inflation are too small to motivate staff. Indeed, many employee surveys are now finding that staff dislike IPRP not out of principle, but because it does not differentiate enough between excellent and poor performers. More recently, concern over the fairness of IPRP has been raised by several studies which show that it can be applied differently for women, black and ethnic minority employees and those with a disability.
2. Competency-Based Pay
What is it?
Strictly speaking, competency-based pay is no more than a specific form of IPRP. It has started to be identified separately in recent years, mostly as it represents a product area which reward consultancies have been keen to promote. In essence, it involves linking individual merit payments to the acquisition and performance of a range of competencies. Most often, an organisation will develop ‘core’ competencies which it feels all its staff should have, together with some technical or functionally-specific competencies. Employees will be assessed against a pre-agreed competency ‘profile’, and a payment will be made dependent on performance against this profile.
Who uses it?
Survey evidence suggests that between 12 and 38 per cent of employers use it. However, surveys conducted by consultants may over-inflate the numbers.
What are its advantages?
Those who support the use of competency-based pay argue that it gives emphasis to aspects of job performance ignored by more conventional target-setting approaches. Specifically, it is argued that how jobs are done can be as important as what is done, and that competencies provide a view of the behaviours the jobholder exhibits. It is also felt that a competency-based approach can encourage jobholders to improve their flexibility by targeting new competency areas.
What are its disadvantages?
Traditionally, competencies have been used primarily for development purposes. Their use for reward has been frowned upon. Now that competency-based pay is more common, it has been possible to see it at work. Evidence suggests that, where concern over the subjectivity of managerial assessment exists, competency-based pay can be controversial. Research shows that such schemes can systematically disadvantage women, black and ethnic minority staff and those with disabilities.
3. Skill-Based Pay
What is it?
This approach to pay rewards the jobholder for acquiring accredited, job-related skills. It is based on the principle that job groups can be broken down into skill modules and levels and that the more of these blocks of skill the jobholder has, the more competent and flexible they will be.
Who uses it?
In the UK it is still mainly used among manual workers in private-sector organisations. Recent surveys estimate that between 14 and 32 per cent of employers use some form of skill-based pay.
What are its advantages?
From an employer perspective, skill-based pay offers the opportunity to broaden the range of skills and tasks which employees can perform. In particular, employers have seen it as a way of challenging the traditional craft or technician job boundaries and moving towards greater multi-skilling. Trades Unions have seen advantages in skill-based pay because it offers employees the opportunity to enhance their skills and, thereby, their market value. In addition, skill-based pay relies far less on subjective judgement by managers (see IPRP) and is therefore favoured over other forms of variable pay.
What are its disadvantages?
Employers who have used skill-based pay have found it costly. In order to work effectively it requires a significant training capability as the demand for skills training is high. In addition, there is often a concern that skill-based pay is a supply-side measure which too often neglects the demand side (e.g. if the business only needs 35 electrical fitters, it is important to ensure that access to this training is limited). Another issue is what to do when an accredited skill is no longer needed by a post. Some firms withdraw the payment, whereas others continue it.
4. Team Pay
What is it?
Any form of payment or bonus based on the performance or output of a team of employees. In some instances, individual performance may be taken into account (e.g. poor performers may be excluded). The payments may be made after a fixed period (as a reward) but they are most commonly offered as an incentive linked to targets or measures at the beginning of a period.
Who uses it?
While interest in team pay is growing, recent surveys show that between 8 and 22 per cent of employers are using it with a proportion of their employees. Interest is particularly high in the Civil Service.
What are its advantages?
Team pay works best where there are well-established teams whose output can be measured objectively. In these circumstances, team incentive bonuses based on 'stretch' targets can have a significant impact on performance in the short-term. In addition, carefully constructed bonuses can improve team working and co-operation, and can focus employees’ attention on key aspects of business improvement. It can also raise the performance of poor performers.
What are its disadvantages?
Team pay can also be a negative influence. It can reinforce divisions within teams, it can lead to the victimisation of 'freeloaders', it can focus effort on the wrong targets and can lead to unhealthy competition between teams. The key to success is effective and appropriate design, clear and regular communication and effective management.
Other Forms of Reward
1. Flexible Benefits
What is it?
It refers to the ability of an employee to access his or her benefits according to their own preferences. Many employers are concerned that employees do not perceive the real 'value' of their benefits package - often taking it for granted. They are also concerned to ensure that employees receive benefits which will have most impact on recruitment, motivation and retention. Offering more flexible access to benefits (e.g. being able to get the cash value of a car, being able to trade in annual leave, forgoing pension rights in favour of cash, etc.) is seen as a way of both making their total value more explicit and offering them in a manner which is valued by employees.
Who uses it?
This is another area being 'talked-up' by reward consultancies. Again, the incidence of this kind of flexibility is relatively low. It is estimated that only 250 such schemes currently exist in the UK.
What are its advantages?
As mentioned above, it offers the chance for employees to tailor their benefits to their own needs. They can help in attracting and retaining employees, and they help make explicit the value of an employee's total remuneration package.
What are its disadvantages?
The main one is that the costs associated with setting up and administering such schemes can be substantial, especially as the evidence of employee demand for flexibility is very thin on the ground. The highest demand tends to be among senior managers, with little interest among employees at lower levels.
2. Recognition Schemes
What is it?
These are schemes which allow local managers to provide immediate (usually non-financial) rewards to individuals or teams who have contributed 'above and beyond' their core job. Some organisations provide line managers with a small budget which they are encouraged to use during the year to take their team out for a meal if they meet a difficult target, or to buy shop vouchers for an individual who has stayed late for a week to meet a deadline. Others have explicit guidelines (even a hierarchy) prescribing the kinds of recognition awards which can be given for certain types of contribution. Most still emphasise the need for line managers to say 'thank you' occasionally.
Who uses it?
These are quite widespread, with between half and three-quarters of UK employers using some form of scheme.
What are its advantages?
There are several. First, they are immediate, and therefore can be very motivational. Second, they are inexpensive - those who use them claim that they can yield results far beyond their direct cost as they have significant symbolic value. Third, they can focus employee behaviour on added value activities such as customer service, or generating and implementing innovations in working practices. Fourth, they can emphasise that the role of the line manager is to motivate and empower his or her employees.
What are its disadvantages?
Again, there may be several - usually as a result of poor design and management. Recognition awards can be seen as patronising, especially if employees feel they are not paid enough. They can be perceived to be unfair, especially if managers are seen to reward their 'favourites'. If they are awarded only to those in high profile or glamorous jobs, they can demotivate those quietly working away in support roles.