Pay

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Pay Determining base pay and total earnings Pay structures Pay structures provide a framework for valuing jobs and understanding how they relate to others within the organisation and to the external labour market. Our annual reward management survey illustrates that a wide range of different types of pay structures exist, linked to varying organisational needs and objectives, including the following approaches:
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individual pay rates, ranges or ‘spot’ salaries narrow graded pay structures broadbands job families pay spines/increments.

Pay structures may need to allow for certain additional elements other than basic pay rates, for example the inclusion of location allowances where appropriate. See our factsheet on pay structures for more detailed information. Pay levels There are various approaches to setting pay levels or ranges associated with pay structures. For example job evaluation is an important tool for setting pay rates among public sector employers, whereas market pricing tends to be more influential in driving private sector salary levels. By employer size, the views of the owner or managing director are more important in smaller firms than in larger firms. Where market rates are used, employers need to determine where to pitch in-house rates (say, at the median or upper quartile level). See our factsheet on market pricing and job evaluation for more information on these topics and the pay data sources available to employers. Pay awards When determining the size of the overall pay review budget for annual pay increases which often includes performance-based pay rises as well as general pay structure movement (commonly known as the annual pay award or cost of living uplift) - the key considerations are:

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ability to pay inflation movement in market rates the ‘going rate’ of pay awards elsewhere recruitment and retention issues.

There are certain variations by sector. For instance, in the public sector the key determinant is public policy and funding together sometimes with union pressure, whereas the latter factor is rarely an issue for many private sector companies. CIPD members can find more information about setting pay review budgets and determining the level of individual and collective pay rises in our guide to the pay review process. Pay progression The most commonly used factors for progressing individuals along salary bands or ranges include individual performance, market rates and competency. The typical approach is a hybrid one that bases progression on more than one factor - involving an assessment of what is achieved by individual employees against the backdrop of what is happening in the wider labour market. See our factsheet on pay progression for more information. Many organisations expect that ‘satisfactory’ performers will progress to a target point in their pay range. Further analysis reveals that the target point among private sector service employers is often the mid-point in the range, while in the public sector the target point tends to be close to the top of the range. In the voluntary and manufacturing and production sectors, employers tend to be more evenly split as to whether the target is at the mid-point or towards the top end of the pay band. Variable pay: cash bonuses and incentives Our reward management survey illustrates the widespread use of bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonuses). Again, however, there are variations by sector - with such schemes more widespread in the private sector. Bonus and incentive schemes are most commonly linked to an individual’s performance, followed by approaches based on organisational performance - the most popular being those driven by business results (such as profit or revenue targets) - and combination schemes that are driven both by organisational and individual performance.

Most employers have more than one bonus or incentive scheme, typically around three per organisation. The advantage of variable pay schemes is that they can link variable pay closely to desired performance outcomes and, in theory, only pay when there is something to pay out. This element of pay is generally not pensionable so an additional benefit for employers is that they sustain no additional on-costs. For more information on cash and non-cash bonuses and incentives, see our factsheet covering these topics. The legal position When determining pay and reward policies, employers must meet legislative requirements including, for example, provisions on equal pay and the national minimum wage (NMW). Equal pay is an aspect of sex discrimination law giving the right for men and women to be paid the same for the same, or equivalent, work. However, in spite of the legislation, there is still a significant gender gap in pay. For more information, see our equal pay factsheet. The national minimum wage applies to all workers age 16 and over. There are currently three main rates - expressed as national hourly rates - covering workers aged under 18, those aged 18 to 20, and those aged 21 or over, together with an apprentice rate. Employees cannot agree to accept a rate lower than the NMW. Full details can be found at the HMRC website (see Useful contacts below). Executive pay In respect of rewards for senior employees, practitioners need to pay regard to the regulatory background and corporate governance standards. The CIPD has produced a list of guiding principles to support the process of determining executive rewards and in our podcast, professionals, practitioners and academics on the CIPD Reward Panel discuss executive pay and bonuses.

The role of employee benefits A wide range of benefits may be provided to employees, from traditional items such as paid leave and occupational pensions to newer elements such as concierge services. There are various reasons why employers offer benefits to employees, for example to match market practice, to provide employees with some measure of security (such as health or disability insurance) or to retain employees (occupational pension schemes,

for instance). Some benefits, such as childcare vouchers, can be tax-efficient methods of remuneration via salary sacrifice provisions. Share schemes are one specific option for attracting, retaining or motivating senior managers (executive arrangements) as well as employees (all-employee schemes), and these may currently be favoured for their capacity to provide long-term incentives in respect of rewarding appropriate performance as well their more traditional function in aiding retention. Flexible and voluntary benefits schemes Typically found in large private sector organisations, flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') are formalised systems that allow employees to vary their pay and benefits package in order to satisfy their personal requirements. Voluntary benefits (where employers arrange for the purchase of goods and services, often at a discount, by employees) are somewhat more widespread than flexible benefits, partly as they have no cost to employers (other than set-up and administrative costs).

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