Factors that influence pay levels

The pay awarded to a job will be influenced by a range of factors which will vary greatly between roles and organisations, the most common being:

1. Seniority

   Seniority is a major determinant of pay, which can be determined by a level or rank of the job in the organisation. Levels can be created by some form of job evaluation scheme, whether on the basis of a whole job evaluation (which is likely to be applied on an intuitive basis in smaller organisations), a ranking system, or an "analytical" system using a points factor basis.

2. Size of the organisation

   The size of the organisation (as measured by turnover/revenue and/or number of employees) is very relevant for senior jobs, less so for junior ones. As a "rule of thumb", the size of the organisation is fundamental for setting the pay of directors and very important for senior managers. It is also important for the pay of middle managers and of some relevance for lower levels of management. It becomes less influential, the lower down the organisational structure that jobs sit, and although it may have some influence in the setting of pay for clerical and operative jobs, this would typically only be obvious in the smallest and largest organisations.

3. Industry sector

   For specialist or senior jobs, the industry sector within which an organisation is operating will probably have an influence on the pay. Some industry sectors are higher paying than others and some have notoriously low pay. This may appear unfair but the market sets pay levels as much for the industry within which an organisation operates as for the function of a job within an organisation.

   The industry sector will have a fundamental influence for senior jobs where the knowledge of the product and industry are pre-requisites to being able to deliver satisfactory performance. However it will have general impact for non-industry specific jobs at the same level. For example, the pay in the computing industry tends to be above average. For this reason, the industry analysis of pay needs to be included when selecting the options for industry specific jobs.

   On the other hand an accountant in a computing company will have pay influenced by the market for accountants, but also by the general pay levels within the organisation, which again will be influenced by the industry, amongst other things. A specialist sales manager in this same organisation might need to be recruited from a very small and competitive market place. The pay for this job could be considerably above that of the accountant at the same level and may even need to be well above the median or even upper quartile level to recruit the person who has the right combination of skill and experience. This would be the case when it is necessary to recruit from a high paying competitor company.

4. Location

   The location of an organisation may be an influence on the pay of the jobs within it. For junior jobs, such as clerical, operative and junior managerial staff, up to junior management or in some cases, middle managers, the immediate location will be the marketplace for jobs and unless there is some other factor, such as a specialist industry job, pay levels will be driven by the location above all else. In this case the town or county will be the driving factor, with others being of little or no influence.

   For middle management jobs, location should be considered an influence, in which case the county or region would be appropriate factors for setting the pay of such jobs. Of much greater importance at this level are the size of the organisation and any industry influences.

   For senior managers, other factors such as organisation size and industry are much more important, but there will still be some influence from the region, with pay levels in some parts of the country being substantially lower than others even at senior management level.

   For directors, location has a small influence on pay, especially in the lower and higher paying areas.

Deciding on the relative weight of these factors

The best way to think about the factors which will influence the pay of a job is to consider where and how you would advertise to recruit into the job. If the local paper would be the typical place, the location is most important. If a specialist, industry-based trade magazine and search and selection company would be the likely recruitment method, industry, region and company size are the driving factors. In other words, think about the competitors in your labour market for the type of employees in your organisation. Are they local employers or other competing organisations in your sector from whom you recruit or to whom you lose staff?

Answering such questions will help you to decide the market place for the recruitment for your staff.

See also our guides on equal pay , equal pay audits and job evaluation - remember that your pay levels must not discriminate unlawfully.

Useful sources of pay information

In addition to looking at job adverts, information supplied by recruitment agencies, surveys by relevant professional organisations (eg AAT and ACCA for accountants, CIPD for HR roles), the following may be useful in finding comparable data to use when deciding upon pay levels. It is worth pursuing more than one source of market data to ensure you have the right information for your industry, size, location and culture. Once you have your market data, if you find that a certain role is now above market rate, consider freezing these salaries to make a cost saving (obviously weighing up the risk of attrition).

• National Statistics - free access to average annual earnings, by industry and region, to help set annual pay increases - click here.
• Business Link offer a free benchmark index for small businesses and a free salary checker covering a diverse range of occupations.
• The Labour Research Department publishes the Workplace Report formed mainly via trade union membership.

In addition, sector specific groups, such as the EEF, collect data relating to their industry which is available to their members, and the local Chambers of Commerce are often able to advise. Finally, there are also commercial organisations which publish reviews and benefits information. Most of these are only available on subscription to members; but some sell their surveys separately, and these can often can be purchased more cheaply if you agree to participate in the surveys.

Frequently asked questions (FAQs)