The People Bulletin

Pay remains a highly emotive issue in all organisations¹. Fair, consistent and transparent pay arrangements help employers retain a more satisfied workforce, and put them on the map when it comes to attracting new staff, and, in tough trading conditions when there is less money to go round for the annual pay rise, a planned approach to reward can circumvent a lot of bad feeling.

Reward strategy

Start with defining your reward strategy. A robust reward strategy reflects the business and HR strategy of the organisation. Spend time consulting with key stakeholders (your management team, staff and unions or staff councils) about where you need to go and why. Your final salary structure will be more easily accepted if you can show that you have delivered what everyone agreed was needed in the first place!

Your considerations might include:

• Base pay emphasis: Is the salary structure mainly around basic pay, or is basic pay just one part of the mix that might include various allowances (e.g. London weighting)?
• Internal/external balance: What is the right balance for your organisation between internal fairness and the need to match external market rates?
• Differentiation: Do you have the same approach for all staff, or do you differentiate according to job or seniority?
• What you’re rewarding: Is it the job or the performance of the individual?
• Other aspects of reward: What else can you put into the mix? How are your benefits perceived? What training and development do you offer? What’s the employee feedback about the environment/culture of your organisation?

All these different choices need to reflect your overall organisational strategy.  You will need to allow plenty of time to plan your reward strategy and it’s sensible to set up a project plan that clarifies the key stages.

Job evaluation

In order to establish internal relativities, you’ll need some form of job evaluation. Job evaluation gives you a ‘rank order’ of jobs from the most basic to the most responsible. It is important to remember that the rank order does not determine pay, and nor does it assess the ability of the job holder; rather it lays a foundation stone for your pay structure. The right approach will depend on the size of your organisation, the variety of jobs, the degree of rigour you wish to deploy, the time available, the degree of complexity you need and how you propose to use the results.

Non-analytical job evaluation

Non analytical job evaluation compares whole jobs. This approach can suit smaller organisations and includes methods such as job ranking, paired comparison and job classification.

• Job ranking involves placing all jobs in a rank order, based on a thorough review of the responsibilities of each job.
• Paired comparison is a statistical technique and compares pairs of jobs. A grid is set up and points are allocated to each job on the basis of:
  • Two points if of a higher value.
  • One point if of equal worth.
  • No points if less important.

This is useful for small numbers of jobs, but quite cumbersome for larger numbers of jobs. For example, to do this for 50 jobs results in 1225 comparisons!

• Job classification compares jobs against pre-determined grade definitions which reflect the hierarchy of your organisation.

Analytical job evaluation

Analytical job evaluation is a more rigorous approach that takes longer to develop and implement. It’s the only type of job evaluation that can be used to defend an equal pay claim.

This approach involves selecting a number of factors, such as technical knowledge and skills, freedom to act, interpersonal skills or decision making. The factors should be decided in consultation with staff and managers in the organisation, because the factors selected need to be what are commonly agreed to differentiate job ‘size’ in the organisation.

Once you have agreed the factors, you should define each factor at different levels and attach a points score to each level. Then each job is matched at the appropriate level of each factor. Once this is completed a total points score for the job is produced and the jobs are put in points score order.

Whichever method of job evaluation you choose, think about who you will involve in the process. Many organisations use a job evaluation panel, made up of a cross-section of staff and managers. Such a panel improves decision-making and increases the likelihood that the whole process will be seen as fair.

From job evaluation to a pay structure

Once you have your hierarchy of jobs you can develop a grading structure by dividing the hierarchy into grades.  You’ll need to decide whether to have narrow grades or broader grades/bands.

Narrow grades provide a clear framework for differentiating pay relativities and for ensuring that jobs of equal value are paid equally. However, if there are too many grades, there may be constant pressure for upgrading. Narrow grades may also reinforce hierarchical rigidity.

In a broader banded structure, hierarchy is emphasised less. The focus tends to be more on lateral development and salary/career progression based on individual performance and/or competence. Broader bands or grades also provide you with more flexibility to place individual jobs at a point in the band that reflects market rates. However, with increased flexibility comes more ambiguity and it can be more difficult to manage a broad banded pay structure in a consistent way. In addition, if you’re linking pay to performance, your managers need to be mature enough to implement the system and you have to be clear about what you are measuring and how you are measuring it. The system could be divisive and demotivating if not handled transparently and fairly.

One further option is to have a spot rate system (‘rate for the job’). As employees don’t progress up a salary range, it can be easier to control costs. However, if you only have one rate to offer per job, consider whether this gives you sufficient flexibility to reward higher performance/competence or to recruit the right person from the external job market.

Whatever you decide, your salaries or salary ranges need to be competitive with market rates. You can check how your pay levels compare with the external market by either doing your own market research, spot checking local advertisements or purchasing surveys.

Key messages about the process

Pay isn’t the only way to motivate staff. In times of economic hardship where the pot for pay rises may well be badly depleted, these ways are more important than ever. Individuals don’t respond well to working in a vacuum so helpful feedback on how they are doing can go a long way – on top of a more formal supervision and appraisal process. Training and development doesn’t have to always involve external courses, but look at ways of setting up internal mentoring or coaching systems and skills sharing workshops. Don’t forget just saying ‘thank you’ for a job well done can do huge amounts for motivation and morale.

Some other considerations are:

• Allow more time than you plan.
• Get the buy-in of all stakeholders as soon as possible – identify which areas are most resistant to change.
• Study your business needs – how are you adding value, what do you want to change and why?
• Involve staff as much as possible – the results will be much better.
• Allow for the emotional impact – pay is a highly emotive issue.
• Performance indicators – how are you going to know whether it has worked or not?
• Keeping it up – what you put in place needs to be ongoing and reviewed regularly.

Good luck!

1This article was first published in the February edition of The People Bulletin but can no longer be accessed following the relaunch of the service in April 2009. Feedback was so positive that we felt we had to re-issue this fundamental guide to pay schemes.