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Pay inconsistency is damaging staff retention

Lack of consistency in employees' pay is having a damaging impact on staff retention, new research reveals.

Data on corporate pay rates analysed by Mercer shows that inconsistency in adhering to pay principles has a dramatic impact on corporate costs and staff retention risks.

Mercer estimates over-remuneration of UK employees adds on average £3,262 per employee to the annual wage bill. Underpayment also adds risk equating to around £800 per employee to an organisation's bottom line.

The inconsistency pivots around the contribution of line mangers, who are often less discriminatory in distributing available pay increases than their business would like them to be. This commonly stems from a lack of clarity on the guiding principles for making awards and a natural tendency for them to generously reward mediocre performance (leaving them with insufficient budget to recognise top performance).

Employees are also confused by the mixed messages they get from the company and their manager, ultimately preferring to trust the grapevine for reliable insights into the company's pay principles.

Chris Johnson, head of Mercer's Human Capital Business, said: "Our research shows that companies spend nearly 40% of their revenues on employee pay and yet they fail to deliver their pay policies effectively. Initial data suggests that this leads companies to waste nearly £4,000 per employee, or nearly 8% of their payroll. Employees know that some of their colleagues are overpaid and others are underpaid: this undermines high performance and employee engagement."

"We support the trend of giving managers discretion over the pay of their people. Companies need to grasp the nettle of communicating clearly to manager and employee alike about pay, and to analysing their own data about how pay policies are operated in practice. Information and insight is the key to effective management of pay and to helping drive high performance and employee engagement."

While the survey shows the impact of overpayment is obvious, the analysis also showed underpayment causes problems and bears a financial risk. Underpayment may provide an immediate ‘saving' to the employer, yet while the line manager may be shaving money off their budget, underpayment creates disgruntled employees. Loss of staff to competitors will ultimately generate costs to the company, not only in terms of recruitment and training but also the loss of income that a dormant position no longer generates.

Mercer analysed 4,990 employees from 16 UK multinationals earning salaries of up to £150,000 and matched the data against Mercer's proprietary database containing 40,000 data points from 191 organisations.