The problem with pay
Employees could hardly be more worried about pay in these times, but what do their employers think about this emotive issue? HR magazine surveyed more than 300 employers - with startling results.
We live in an age of austerity and, while the phrase is perpetually touted by the press, politicians and employers, there is no doubt that fears of redundancy, pay cuts and pay freezes remain at the forefront of employees' minds as they live in the shadow of recession.
These, coupled with the never-ending barrage of news about 'excessive' bankers' bonuses while staff in other companies struggle with dwindling pay scales and long-term remuneration deals, make the already emotive subject of pay a more serious one than ever for employers.So HR magazine joined forces with US total rewards association WorldatWork to get to the bottom of employers' views on pay. And the results of our survey are startling.
Given that pay is, in essence, the primary reason people come to work, a strategy around how salary is used should be vital for the savvy employer, but our survey found that more than a third of employers (36%) admit they have no strategy around pay at all, while a further 31% have no written pay strategy. This leaves only 33% of employers polled who have a clear plan for how remuneration fits into their long-term plans for the business - and who communicate it openly to staff.
According to WorldatWork, the prevalence of defined pay strategies in UK organisations is considerably less than that of the US, where 91% have some form of written or unwritten pay strategy, compared to 64% on this side of the Atlantic.
"The existence of a written strategy has been shown to positively affect employees' understanding of the organisation's compensation plans or schemes," explains Kerry Chou, compensation practice leader for WorldatWork.
However, the findings disturbed Daniel Hibbert, a director at PricewaterhouseCoopers HR Services. He explains: "If an employer is spending 50% of its revenue on salary, it should have a clear strategy, instead of an over-reliance on the market.
"A pay strategy means the employer has made sure a job is aligned with the market and is fair to staff internally. It should take into consideration organisational performance and the direction of the business."
David Wreford, EMEA leader of consultancy Mercer's compensation management group, adds: "Most organisations will look to review their pay and reward strategy, but they need to be smarter in having appropriate functions, order and discipline for pay. Reward cannot be isolated in an unclear and imprecise strategy."
Despite Wreford's advice, the survey showed that market pricing – or paying staff the 'going rate' in the market – is still the most popular consideration in salary decisions, according to almost half (48%) of the respondents. Just over a fifth (22%) of those surveyed use the ranking method, where jobs are put into a hierarchy, from those deemed deserving of the highest pay down to low-level positions.
According to WorldatWork, market pricing is the most prevalent job evaluation in the US, where the percentage is closer to 70% or 80%. The ranking method is much less popular in the US, where only 2%-4% of employers use it.
Andrew Macleod, principal consultant at HR consultancy Aon Hewitt and lead of its reward services practice, explains: "The market-pricing statistic coming up top in the UK is surprising. We see a lot of it in the US and in US subsidiaries over here. But in order to use it, employers need abundant and robust salary data."
HR magazine asked respondents what their base salary targets for each job in their organisation were, compared to the relevant sector. Across management levels, sales, production, professional and administrative, between 50% and 54% said they did not have a target, or that it varied. And, on average across all the job levels, just over a third of employers do not match any jobs to survey models.
Despite the fact that most employers do not have a formal pay strategy, the vast majority of respondents still use cash methods to incentivise staff. The most common pay schemes are overtime (37%), long-service bonuses (29%), performance-related pay (26%) and job-relevant salary structures (26%).
However, bonuses, which are often contractual, are still the most popular form of incentive, with a massive three-quarters of those polled (73%) having a bonus scheme in place and 53% of all respondents having paid staff some form of bonus in the past financial year.
Commenting on the findings, Ryan Johnson, vice-president of research at WorldatWork, says: "In terms of recent incentive plan payouts, organisations in the UK appear to have a wide variance of results, with 41% indicating their incentive or bonus schemes paid out at or above the target level. Conversely, 34% said their payout was either below target or that no bonus was paid at all. This is indicative of the wide-ranging effects that the economy is having on different organisations, where some appear to be thriving or at least recovering, while others remain in deep distress."
Hibbert explains: "In spite of these findings, a lot of organisations have cut down on the number of staff they are giving bonuses to. Perhaps in 2008, 80% of employees (in a given organisation) received a bonus but this dropped to 20% last year."
Despite bonuses being paid out, 54% of employers admit they have implemented a pay freeze over the past year.
Hibbert adds: "There is a link between bonuses and pay freezes. An employer might freeze base pay, but award a bonus to the best people. So, fewer staff have a bonus, but there is definitely process and thought behind it."
Wreford is quick to point out that bonuses are not adding to a fixed cost base when it comes to pay, so where organisations are forced to freeze pay, they can link bonuses to the profitability of the company and save this cost.
But pay freezes are only one method by which employers are controlling costs around pay. The findings show other decisions include recruitment freezes (50%), mandatory redundancies (35%) and voluntary redundancies with incentives (21%). A tenth of those surveyed had cut employees' pay and 9% had reduced the contribution they made into company pension schemes. "In the next few months, employers ought to reassess their employee value proposition to key in on those factors, both tangible and intangible, that would help them attract and retain talent," advises Johnson.
Even if making redundancies, employers who took part in the survey were divided on the best way to operate their severance schemes. Less than a third (28%) have detailed severance policies in writing, outlining the values of severance payments, should a member of staff have to go through redundancy consultations, while almost one in every seven employers (15%) does not have any written severance schemes and policies at all - and only 2% have employment contracts for top executives.
Johnson says: "It is significant that fewer than one in three organisations have detailed, formal policies in writing. Companies, both large and small, would be wise to have a formal, detailed severance plan in place for all employee levels. These should be reviewed regularly, about once every 12-18 months. You can't just set it and forget it."
On a more positive note, the recession and subsequent need for cost-cutting have led to a growing number of employers adopting a more flexible approach to work.
The survey shows that both flexible working (62%) and remote working (43%) were seen as cost-effective ways of increasing employee engagement. Almost half (46%) of the HR professionals or CEOs surveyed say that between 1% and 10% of the employees in their organisation, who are able to work remotely, do so at least once a week, while 2% claim that everyone in their organisation who can work away from the normal workplace carries out their job remotely at least one day a week. Some 17% admit that none of their staff work remotely on a regular basis.
Wreford explains: "Reward looks at both tangible and intangible things. Employees will value flexibility and organisations are clearly choosing to invest more in intangible reward, such as encouraging flexible working."
Adam Sorensen, global rewards practice leader for WorldatWork, still thinks there is room for improvement.
"Dramatic technological advances mean that being 'at work' doesn't necessarily mean being in the office," he says. "Managers must learn to manage what they can't see."
This is the first year HR magazine and WorldatWork have conducted this survey, but experts such as Aon Hewitt's Macleod agree the findings will be different next year or thereafter.
"We will see a significant shift away from cost containment and cost reduction in terms of incentives," says Macleod. "Organisations will be performing relatively well and market pricing depends on the strength of the market, so employers will become more reticent."
But given the recent government spending cuts and their effects on the public sector (with 725,000 jobs at risk, according to the CIPD), Hibbert believes there will be a polarisation in pay between staff in the public and private sectors. "There will be big differences next year in the public sector," he warns, "but in the private sector we will see a return to pay increases - although I wouldn't expect the results to be radically different for about five years."
The key lesson for all employers, as both the statistics and the experts agree, is governance over pay going forward, to ensure clarity, fairness and employee engagement with reward.
"Compensation is different from other forms of reward," says Wreford. "The line manager is a component part of deciding staff pay. This means decisions can be subjective and businesses have to ensure they move away from the idea of 'set budgets'. Some people will always be overpaid, while others will be underpaid.
"You can't take a simplistic view," he adds. "Clear governance, technology, data and open communication will be essential in paying staff what they deserve."
Which of the following has your organisation used in the past 12 months to increase employee engagement (indicate all that apply)?
Flexible working 62%
Remote working 43%
Overtime pay or time off 37%
Long service awards/stay bonus 29%
Separate salary structures for different sets of employees 26%
Performance-related pay market adjustments/increases to base pay 26%
Employee referral bonus 25%
Special cash bonus/group incentives 23%
Part-time employment with benefits 22%
Job sharing 21%
Compressed work week 19%
Flexible retirement 16%
Individual ad hoc bonus change commission structure 15%
Share option programme 13%
Paying above market 8%
Paid sabbaticals 7%
None of the above 13%
Which of the following cost-containment or reduction strategies has your
organisation used in the past 12 months (indicate all that apply)?
Pay freeze 54%
Recruitment freeze 50%
Mandatory redundancies 35%
Limit/eliminate overtime 32%
Voluntary redundancies with incentive 21%
Voluntary unpaid time off 12%
Pay cuts 10%
Pension scheme reductions 9%
Temporary layoffs 4%
Mandatory unpaid time off 1%
Which of the following describes the payout for your incentive/bonus
plan for your most recent fiscal year (choose one option)?
A below-target incentive/bonus was paid out 11%
Incentive/bonus was paid out at target 28%
Don't have an incentive/bonus scheme 26%
No incentive/bonus was paid out 22%
An above-target incentive/bonus was paid out 13%
HR magazine surveyed 313 business people with a responsibility for HR in their organisation, using an online poll, between September and November 2010.
The majority of respondents were HR managers (30%), HR directors (14%), heads of HR (8%) or managing directors/chief executives (8%).
The size of respondents' organisations varied, with 34% working with less than 100 staff and 33% in organisations with in excess of 1,000 employees.
Of those polled, some 37% reported a turnover of more than £10 million over the past financial year, with 7% reporting more than £1 billion in turnover.
Respondents represented all sectors of the economy, with 10% coming from local government, 10% from professional services, 8% from the charity or voluntary sector, 6% from business services and 6% in education.