Which pay theory do you think is the most important when developing a pay system

2. Consider internal equity holistically

Initial research will identify if there are any internal equity concerns to factor into the new pay structure. People want to know they are working for a company who pays fairly and that they are not being underpaid in comparison to a colleague. This applies in law through the Equal Pay Act 2010, but also extends to Gender Pay reporting. The discovery phase exercise of putting in place pay structures can help identify areas of risk from an equal pay perspective.

Our UK Reward Management Survey highlighted how organisations are increasingly looking at their wider demographic pay records to achieve parity of pay throughout the business. 85 per cent of respondents have diversity and inclusion initiatives in place, up from 76 per cent last year, demonstrating the focus on fairness by employers.

3. Use a robust methodology

When competitors change their reward design, it is tempting to want to pick and choose elements to copy and to pay the most. However, understanding the market position is the start of the process. This will need to be balanced with affordability and the other reward elements in terms of the investments being made, but also the culture. One pay structure will not work identically for another company. When we work with employers to pay structure projects we take an evidence-based approach to guide the selection of the best pay structure.

A key choice will be whether to follow an analytical or non-analytical job evaluation. There are pros and cons to each choice, as there are when it comes to selecting pay ranges or spot rates when it comes to setting salary. We recommend following the analytical method so that decisions around roles and where they fit into the structure can sustain the organisation in the long-run. It also provides a defence in Employment Tribunal proceedings over equal pay too.

4. Actively listen to employees

By identifying what your employees want from their reward package, this will help to guide the design and any nuances required of the new structure to truly drive employee engagement. Whilst the data analysis part can focus on balancing what is currently being paid against what the market is doing, it is important to meet the needs of stakeholders which should not be assumed. It is important to approach the exercise as a blank slate, with employees given the opportunity to outline what matters to them. Feedback may be more about the importance of internal parity of pay or opportunities to progress that go beyond purely financial equations.

We recommend an implementation period of between 3 – 12 months to ensure the success of the project. Without proper methodology and a strong communications plan, 70 per cent of change projects fail. Bringing your employees with you, by communicating why a revised structure is needed and the benefits to them, will need to be planned as early as possible to achieve maximum buy-in across the organisation.

5. Manage career progression within a clear and transparent structure

Employees need to be able to see where they go from here. By having a clear pay structure,  employees are equipped with a roadmap for progression. This also supports Line Managers roles as they can all sing from the same hymn sheet, producing more consistent performance management decisions across an organisation.

A clear structure organisation-wide can also assist with managing payroll costs. One third of UK Reward Management Survey respondents anticipate that they will award out of cycle pay increases that account for up to one per cent of their annual pay bill. 78 per cent cite market pressures being behind the decision to make an out of cycle increase, whilst 52 per cent cite internal pay alignment and 28 per cent say they are driven by pay restructures. This matrix of individual decisions affects affordability and control, directly skewing ‘official’ figures for pay awards. Introducing a robust structure can reduce inconsistencies and provide Finance with more budget certainty.

Get in touch

Whether it’s a health check, analysis on your existing job evaluation framework or benchmarking, get in touch with us today so we can help you improve your current approach to pay. To listen to Joe’s advice in full, watch our latest webinar on demand about the key elements you need to consider when developing a pay structure and the main pay structures open to you.

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7 Key Considerations to Develop an Effective Pay Strategy

7 Key Considerations to Develop an Effective Pay Strategy

Payment Strategy Consideration Factors

Developing an effective pay strategy is critical to attracting and retaining good employees. The more employees feel that they are being compensated fairly and equitably for the work they do, the more likely they will want to stay working with you.

Here are 7 key considerations when determining your company’s pay strategy:

1. External Equity – how the company pays in relation to the external market

  • Ensure that you have a job description which details the responsibilities and qualifications required for the position.
  • Determine the fair market value for the position by matching the job description to other positions out in the market. We recommend using reputable salary surveys for market data, rather than free online sources.
  • Determine where you want to pay in comparison to the market (e.g. at market value, above market value, below market value).

2. Internal Equity – how positions within the company are paid in comparison to one another

  • Ensure that positions of a similar level of responsibility, or that contribute similar value to the success of the company, are paid comparably.
  • While two people in the same or similar level of position do not need to be paid identically, they should be within a similar pay range.
  • You should be able to justify why one person is paid more or less than another based on considerations such as: education, experience, job performance, goal achievement, longevity with the company, and other notable factors.
  • Be mindful that if the internal equity is off balance, this can affect employee morale, satisfaction and productivity.

3. Payroll Budget

  • Determine your overall payroll budget.
  • Ensure that you always meet your payroll obligations and pay employees when you say you will.
  • Budget for other payroll costs such as statutory obligations (e.g. contributions to Employment Insurance, Canada Pension Plan, workers compensation, statutory holidays, vacation pay) as well as the cost of any benefits or incentives that you will provide.

4. Variable pay

  • Determine any variable pay for which employees will be eligible.
  • Variable pay includes payments, in addition to the employee’s base pay, such as bonuses, gain-sharing, profit-sharing or commissions, where the payment received is based on performance factors.
  • Determine the amount that each position/employee will be eligible for.
  • Determine performance levels that the company/employees need to achieve to receive variable pay.

5. Long-term Incentives

  • Determine if there are any long-term incentives that you are willing to tie into positions in the company, such as: stock options, employee share ownership or long-term cash incentives.
  • Determine how you are going to measure employee performance in order to receive these incentives.

6. Benefits

  • Determine whether you will be offering benefits as part of your overall pay strategy.
  • Determine the types of benefits for which employees can be eligible (e.g. medical coverage, extended health insurance, dental insurance, life insurance, disability insurance, health spending account, etc.).

7. Rewards and Recognition

  • Determine additional ways to recognize and reward employees in order to enhance your pay strategy.

Paying fairly is the first requirement for an effective pay strategy. It is important to ensure that all components of pay (including base pay, salary increases, and bonus or incentive compensation) are well thought-out, easy to explain, and are considered fair, in comparison to both the external market and internally within your company.

For assistance in creating an effective pay strategy for your Vancouver-based small- to medium-sized business, please contact Clear HR Consulting.

Copyright Clear HR Consulting Inc. All rights reserved.

clearhr2019-07-22T11:56:29-04:00

What are some of the pay theories that organizations should consider in developing a pay system?

The three main compensation management theories are: behavior reinforcement theory, equity theory, and agency theory.

What is the most important standard for determining pay?

5 essential factors for determining compensation.
Years of experience and education level. It probably goes without saying, but the more experience and education a candidate has, the higher their expected compensation. ... .
Industry. ... .
Location. ... .
In-demand skill sets. ... .
Supply and demand..

Which theory of compensation explains the employee & employer relationship?

Agency Theory: This theory states that both the employer and the employee are the stakeholders of the company, and the remuneration paid to the employee is the agency cost.

What are the pay systems?

What Is a Job Pay System? A pay system is the method used to determine what a position should pay and how much a person should earn. It may take into consideration a person's experience, knowledge, and the skills necessary to complete a job. It also provides a fair and consistent method for determining a pay rate.