How often do we tell you to ‘start with why’?
Many organisations have some sort of framework in place for base salary. But the next step is to consider why pay should progress. Communicating this to employees provides them with a clear understanding of what they need to do to advance their salaries and grow in their careers.
Honestly communicating why some employees fall at the lower end of a pay range can greatly improve your company culture and build loyalty and trust among employees. All people want to know is whether they are being treated fairly.
In fact, a PayScale survey found that employees who were paid below the market rate had a job satisfaction rate of only 40%. However, when their managers took the time to explain the reasons for their pay, their satisfaction increased to an impressive 82%.
By understanding why pay differences exist within your organisation, you can build a culture of trust. From here, you can reassure employees that there are solid factors contributing to their pay progression and explain how they can move to the next pay band.
This blog will explore five common factors that lead to pay progression and highlight our recommendations.
Historically, this has been the most common way of progressing pay in the private sector. It works on the assumption that an employee’s current performance will lead to a better ongoing contribution to the organisation.
Leaders often spend considerable time and resources ‘managing’ the performance of employees and the outcome, e.g. performance ratings, decides the pay increase for each person.
There are two challenges with this approach:
- It relies on having a fair and consistent performance management process. This is difficult to monitor, particularly in a large organisation.
- High performance in one year does not always guarantee high performance in future years. Despite this, people are still rewarded with a permanent pay increase.
Length of service
This is more common in the public sector, although some private sector companies continue to reward people based on length of service as well.
Let’s not beat around the bush. This is a bad idea.
Think about it this way:
If Serena Williams, with twenty-three grand-slam titles to her name, was playing a teenager in the Wimbledon final, would we give her more prize money for winning, simply because she’s been playing longer?
Isn’t that absurd? Pay progression based purely on length of service, when the employee may be making the same contribution as their colleagues, is no different. And that’s before we get into the equal pay or age discrimination risks.
Skills and competencies
Many companies prefer to progress pay as people develop their competencies. As employees gain new skills, they usually contribute more to the organisation.
For instance, an HR manager typically earns a higher salary than an HR analyst. This is because more skills and competencies are required to fulfil the HR manager role, such as communication, leadership and problem-solving.
Communicating the skills and competencies required or expected within different roles and pay ranges will allow your employees to understand exactly what they need to do to progress their pay. It also explains the reasons for any pay differences within your organisation.
A significant change in skills or competencies can be measured using a job evaluation process and reflected in pay.
When an employee passes an exam or gains a new qualification, it often leads to pay progression at the discretion of their manager. However, there are some organisations that implement a formal mechanism for this too.
The rationale behind this is largely to maintain external competitiveness. It is also indirectly linked to skills and contribution as qualifications allow individuals to develop their capabilities and knowledge. As a result, they can contribute more to the organisation.
When an employee passes their exams, their market value goes up. For example, a part-qualified accountant will demand a significantly higher salary than a finance graduate. If an organisation’s pay progression doesn’t reflect this, its employees are likely to go elsewhere.
However, this doesn’t mean that all qualifications should result in a pay increase.
This 3R Strategy’s recommended approach, and what we use with our clients. Total contribution looks both at input and output. This means not just what people are accountable for, but their behaviours, development and wider contribution to the team and organisation.
The purpose of this approach is to recognise and reward colleagues’ personal contribution and to support their development.
It’s important to look at behaviours that are aligned with our organisational culture. Often, there is no clear definition for an employee of what is expected of them, nor for the line manager to be able to make an assessment. There is simply a rating based on the manager’s assessment and ‘gut feeling’.
Finding the balance
When considering pay progression for your employees, it is important to think about what determines an individual’s ongoing value to the organisation. To a large extent, this will be driven by the external market. If you’re not competitive, it will be difficult to attract or retain.
However, if affordability is an issue, communicating clearly and honestly to your employees should be even more of a priority. Highlighting the reasons behind your decision to pay under the market rate can offer clarity and build trust.
Striking this balance can be difficult. You can’t give one person a high salary for achieving a qualification if day-to-day they are still carrying out the same role and making the same contribution as their colleague on a lower salary. This will present an equal pay risk.
However, clarity around pay progression is vital for fostering a culture of trust and fairness within an organisation. By understanding and communicating the factors that drive pay progression, organisations can motivate employees and cultivate loyalty.
Rewarding employees based on total contribution enables organisations to acknowledge and appreciate employees for their development and behaviour.
Get in touch if you would like support developing a fair and consistent approach to pay progression in your organisation.