How to undertake a pay review

This guide is intended to help you to think about your objectives, the process and the impact of your pay reviews. The list of actions in this guide is not intended to be exhaustive, but is intended to help you to think about this important process and hopefully will guide you to a solution which achieves what you want to achieve and are able to afford.

You may also want to print a copy of your reward policy for your employees.

Business issues

Undertaking a pay review requires thinking about the business as a whole. Increasing pay will have an impact on your costs: for example certain parts of the business may need higher pay increases than others; it could be that the business is suffering considerable contraction along with the market place, as pressures in the economy or overseas are driving the business to change its structure. Your business may be re-engineering itself to fit the needs of the marketplace or the products that you produce, or the services that you sell are going through considerable change. All of these will have an impact on your business, its finances and ultimately its ability to afford a pay increase.

Examples of the questions that you need to consider when undertaking a pay review are:

• What are the sales and profit forecasts for the business, how are they changing compared with last year, how realistic are they when considered in the current environment based on present performance and the state of the markets?
• Do you need more or less output from your business?
• What are the opportunities to increase prices and/or productivity to pay for the pay increase?

There may be many more, according to your circumstances.

A pay review cannot be undertaken in isolation and failure to give your business issues sufficient consideration is likely to result in problems later, either in the pay review process or, more seriously, in the business in the forthcoming year or period of the pay review.

Employee relations

Employee relations issues will always exist within any business but may not be formally identified unless there is a trade union recognised or some other formal negotiating structure. However you should always consider employee relations when working on the strategy for pay review. Employee relations issues are often specific to the organisation and need consideration alongside the business issues. However, the following points could be worthy of consideration together with others which are pertinent to you:

• How many bargaining groups are there and how would you plan to manage the review process between them all?
• Are there any bonus or piecework or other performance pay systems that need to be reviewed, or have any fallen into disrepute and need to be replaced?
• Would it be helpful to have a one, two or even three year deal and if so why?

Pay structure

The structure of pay within the business is likely to be different for the various employment groups. Although it is often better to have a single pay structure for all employees, it is more typical to have a range of pay structures dependent on the level within the organisation. These should be considered when thinking about the pay review process. The following questions may start your thinking in this:

• Do you have pay grades and, if not, has the time arrived for them to be considered and introduced?
• Has the time come to introduce or change the job evaluation system?
• Are you confident that this complies with the Equal Pay Act ? Have you done an equal pay audit ? Are there groups within your organisation which need special consideration due to historical pay anomalies which you are trying to resolve?
• Do you want to reduce the amount of overtime and the associated costs? Does your current system work properly, or is it abused at all? If so, do you need to negotiate a change to the overtime rules?

Pay levels

This is the central issue. The items up to this point have set the scene for the pay review and deal with some of the specific issues that are raised as part of it. The questions below again are far from exhaustive but they do cover some of the critical points which might typically occur:

• From the standpoint of the business, by what amount can the pay bill rise? Consider turnover projections, market fluctuations and recruitment requirements.
• Do you wish to adopt a merit pay award, where individual pay rises are directly related to their job performance?
• Is it to be a percentage increase for each of the groups defined above or is it to be a fixed amount, thus potentially giving more to one group than another in percentage terms?
• As a result of the market intelligence on pay data for the various employee groups, do you need to make any market adjustments to protect against labour turnover and poaching by competitors?

What other factors influence your pay levels?

Benefits

Benefits (ie the elements in a reward package other than basic pay) also need to be considered. The following typical questions should be considered, together with those that are appropriate for the business:

• What is the current cost of the benefits package and can this be sustained?
• Do you want to increase benefits and, if so, for which or all groups, or do you wish to reduce benefits and, if so, for which or all groups?
• Do you want to offer some flexibility on the benefits package and if so which benefits and for which groups?
• Do you wish to trade additional basic pay for additional benefits, or vice versa?
• Are your current benefits appreciated and desired by your employees, or are you wasting money on benefits which give no value to the individuals? You might like to do a simple survey to ascertain this.
• What does your market research suggest are important benefits to provide, if you are to remain competitive in your labour market/s?

A few tips

The CIPD suggest that private sector organisations use market data to influence their pay reviews, whilst the public sector use job evaluation and the manufacturing industry make their decisions based on their ability to pay and drive this through the collective bargaining procedure. Based on this assumption, the following information provides practical advice when faced with a pay review.

1. If negotiating with collective representatives, but also if discussing with senior management or a board of directors, ensure you allow yourself time to prepare your pay review presentation, as all involved will want to know the background to the pay review figures, such as turnover, profit and loss, absence, attrition, market data etc.
2. It may be worth collating previous years' pay review data so that you can put your arguments into context.
3. If you are part of an international organisation, and head office is external to the UK, ensure the relevant decision makers are aware of relevant facts such as inflation and the term 'cost of living', London weighting if appropriate and current market data, as sometimes they are not fully up to speed with these factors, and don't consider them when setting pay review budgets.

Advice specific to collective bargaining pay reviews:

1. Prepare the organisational climate well ahead of the pay review. If things aren't going so well (failed targets, sales down etc) ensure employees are aware so that the reduced pay figure is less of a shock.
2. Ensure you are confident that the % range you have given to work within at your negotiations is agreed in advance. There is nothing worse than spending time in pay review negotiations only to find out that the budget has changed!
3. If you have "sister" sites that are in some way linked to your organisation, but perform their own pay review, keep in contact so that you are informed of their pay details.
4. Only consider a long term pay deal such as a two or three year agreement if you are financially able to plan this far in advance. If you go for this option, insert a clause that enables you to re-negotiate the deal in extenuating circumstances.
5. Use your relationship with your senior representative (convenor, lead employee rep etc) to work with you to gain consensus and acceptance.
6. Never give away an extra % for nothing! Take a broad perspective and look to gain something in return such as a reduced night shift premium or removal of a piecework bonus.

Frequently asked questions (FAQs)