Pay system design - Employee pay and benefits

Even in the smallest employer its well worth putting in place a formal procedure for reviewing salaries. The key is to have a logical review process and for all employees to know what it is.

Pay systems have two main objectives, the first is obviously to competitively remunerate employees for the work they do. The second is to control costs. Pay systems do not need to be complicated. The following are the steps that need to be taken in their design:

Step 1. Identify the Categories of Employees

Larger companies will probably use some form of job evaluation (indexed opposite). This is not essential for smaller companies but they should go some way to understanding what duties their employees perform.

The simplest way to do this is to group jobs into job families. Typically these might be Clerical and Administrative, Information Technology, Skilled Manual, Accounts, Sales and Marketing etc. It is likely that each job family will have a series of Groupings with a mixture of jobs in each step for example:

	Job Family Clerical and Admin	Job Family Sales
Group 1	Junior typist Filing Clerk	Sales Trainee
Group 2	Typist Switchboard Operator	Receptionist Junior Salesman
Group 3	Secretary HR Officer	Salesman
Group 4	PA Office Supervisor	Sales Supervisor

For most small companies it should be possible to produce an overall structure covering all jobs on one side of A4 paper.

Whilst job evaluation gives a clearer rationale for the groupings, in most small companies this kind of grouping can be constructed simply by involving a group of managers meeting and fitting the jobs into the structure. However if companies go for this simple approach it is essential they consider the whole range of tasks associated with the job and do not base decisions on prejudices (this can lead to discrimination particularly between typically male and female jobs).

Step 2. Decided on Pay Strategy

The decisions that need to be taken for each Job Family are:

The balance between salary and cash payments. For example the balance of cash payments is likely to be far higher for a sales job than a routine clerical one. See section on performance pay (indexed opposite).
The benefits offered with each Group. For example it is likely salesmen will be offered the use of company cars for their private use, a benefit not available to staff in other jobs.

Step 3. Determine Market Rates

Remuneration consultants will give the impression that pay research is an exact science, producing sheets of statistics on the subject. The truth is that whilst good market data is important there is always a large uncertainty figure in any pay data. This uncertainty factor arises because there are major differences in regional pay levels and most pay surveys are not sufficiently differentiating. In addition jobs grouped in pay surveys often have different responsibilities even though they may have the same job title.

Whilst remuneration consultants can provide useful information companies should also make use of other data available to them. Such data comes from local job advertising, Chambers of Commerce etc. But companies should be careful not to overreact to job offers made to employees. Such offers are often based upon promotion to a more senior job.

Once market data is available decisions need to be taken on the pay ranges to be associated with each job family. The final pay structure may then appear as follows:

Job Family                   Clerical and Admin

Pay Range

Cash Bonus

Group 1

Junior typist

Filing Clerk

£7,000-£8,500

3%

Group 2

Typist

Switchboard Operator

£8,000-£9,500

3%

Group 3

Secretary

HR Officer

£9,000-£12,000

5%

Group 4

PA                          Office Supervisor

£12,000-£16,000

5%

This then creates a set of Clerical and Administration pay curves as follows:

A similar set of pay curves can be created for other job families.

Decisions as to where individuals fit into the pay range should be based upon personal performance and experience. One would then expect to appoint someone into a job towards the lower end of the range and for them to progress towards the middle as they become fully experienced. Sustained high performance would justify payment towards the top of the range.

Step 4. Controlling Costs

All employers experience members of staff complaining they are underpaid. Often they refer to an advertisement for alternative employment or may even have such an offer. If they do not have a logical review process it is difficult for employers to react to such requests, particularly when faced with a valued member of staff. The immediate reaction can often be to offer a salary increase, this then creates a knock-on effect amongst other staff.

It is important to bear in mind that pay advertisements very rarely match existing jobs in organisations and often those staff with alternative job offers will move into a more senior job with their new employer. A logical structure as described above permits employers to react to such `requests.

Step 5. Communicate

Having constructed a logical, market pay based structure there is good reason to communicate it to all concerned.

Remuneration refers to the cash and benefits provided by an employer to an employee for fulfilling the employment contract.

This page gives an overview of remuneration within organisations more detailed guidance is contained in the separate subject pages.

The rewards made available to an employee for the work they do reflects:

The market rate for their skills, education and experience.
Their performance.
The balance between salary and cash bonus.
Pay levels generally within the company.
The level of non-cash benefits provided with the job (e.g. company cars, pension etc).

Companies should also take into account the need to comply with the minimum wage (indexed opposite). Also note by statute an employer cannot make a deduction from salary or fail to pay an employee their full contractual salary unless the deduction has been authorised in the employees contract of employment or the employee has agreed in writing to the deduction (see also contract of employment).