CIPD - Pay progression

Pay and reward

September 2008

This factsheet gives introductory guidance. It:

defines and explains the rationale for having specific pay progression arrangements in place
explores the impact of pay structure design on employees’ potential for pay progression
summarises the characteristics of different types of pay progression arrangements and the extent to which they operate among employers
assesses trends and changes to methods of pay advancement in recent years
examines techniques for controlling pay progression
summarises key issues involved in the management of pay progression
includes the CIPD viewpoint.

The concept of pay progression

Pay progression refers to the process by which an individual employee attains higher levels of pay within a range attached to a pay grade or band. In this context, pay progression may be regarded as ‘real’ growth in pay, that is, in addition or separate to ‘cost of living’ – or inflation-linked – increases and/or the attainment of formal promotion to a higher grade or band.

Systems for pay progression may be designed to achieve a number of key aims:

to support business strategy by encouraging and rewarding desired characteristics or behaviour in employees such as performance or length of service
to maintain competitiveness of pay while also controlling paybill costs within set parameters including affordability
to provide employees with a fair and, as far as possible, transparent process by which individual pay increases are determined.

Different methods of pay progression are closely associated with various types of pay structures.

Go to our factsheet on pay structures

Impact of pay structures on individual pay progression

Number and width of grades or bands

Pay structures are usually designed to incorporate specific arrangements for pay progression for employees. As noted in our factsheet on pay structures (see link above), there are two key characteristics of pay structures that particularly affect pay progression:

the number of pay grades, levels or bands within the structure
the span, or width of each pay band – that is, the degree of variation in pay levels associated with each band.

The span of each pay grade or band may be expressed as the percentage increase from the minimum to the maximum salary in the range. For example, a grade attracting pay at levels ranging from £30,000 to £36,000 would have a width of 20%. The wider the span, the greater the potential for pay progression within a grade.

Traditional narrow-graded pay structures feature numerous grades with relatively short pay ranges associated with each grade – typically with a span of around 30-40%. Pay progression in such systems is often based on service-related increments, hence providing for considerable certainty of pay progression albeit over a limited period.

By contrast, many modern systems work by reducing the number of grades or bands while widening the pay range attached to each level – to 100% or even more in many broadbanded systems. Thus more jobs would be found within one grade or level than under traditional multi-graded systems. One benefit of such systems is the scope they provide for lateral career development – particularly in de-layered organisational structures – hence allowing some progression without the need for promotion.

Advancement to higher grades or levels

Pay progression may be attained either by moving to higher points on the pay range within a band or grade, or by gaining promotion to a higher grade or level. While the focus of this factsheet is pay progression within grades, it is important to bear in mind the potential for pay progression via grade advancement when considering different pay arrangements, and the differentials and overlap between grades.

Differentials

In a traditional graded pay structure, differentials refer to the percentage difference in pay levels between the mid-point of one grade and the mid-point of the adjoining grade. The differential needs to be high enough to reward employees for the taking on of a post at a higher level of responsibility. In a typical narrow-graded pay structure, for instance, a common differential would be around 20%.

Overlap

There may be a need for an overlap between the top levels of pay attached to one grade and the lower levels of the adjoining grade up. This might recognise the greater value of the input from a highly experienced or skilled individual at the top end of their grade compared with a newly appointed employee on a learning curve at the lower end of the grade above.

Inflation-linked pay rises

In the most basic form of pay structure or system – such as spot rates for manual workers – it may be that a simple ‘cost-of-living’ increase is applied to all pay rates each year, that is simply increasing pay rates for every employee by a percentage broadly in line with inflation. Such arrangements obviously do not provide any scope for ‘real’ pay progression, as they are simply keeping pace with inflation.

As employers seek greater flexibility and a sharper focus on high performance levels, ‘cost-of-living’ pay rises are increasingly rare, being largely confined to parts of the public sector or some of the minority of private sector firms where collective bargaining with unions still exists.

In the case of more complex pay structures, it is also typical for an inflation-linked adjustment to be made across the structure each year. But this often takes the form of an inflation-based increase to pay levels or grade ranges across a particular pay structure – sometimes excluding certain levels or minimum rates, for example to freeze pay for poor performers – rather than necessarily giving each individual within that structure an identical pay rise. A range of other criteria (see below) may then be used in determining individual employees’ pay progression along the pay ranges attached to each pay grade or band.

Some employers award both a cost-of-living increase and a separate award using one or more of the methods below, or the two factors may be combined in determining a single pay award (particularly popular at times of low inflation).

Methods of determining pay progression

Brief definitions of the various methods for advancing individual employees along the pay ranges associated with their band or grade are set out below.

Service-related increments

This is a simple form of pay progression where an individual progresses through a number of incremental pay points with each year of service in the organisation (usually up to a maximum point that is reached after a certain number of years). Such arrangements may reward the build-up of expertise in the job and also help with employee retention. A traditional method of pay progression in the public sector, such increments may be popular with employees for providing certainty. However, they are rarely used by private sector employers who tend to favour arrangements that reward factors other than simple ‘time served’. Moreover, progression based on length of service may indirectly discriminate against women as they are more likely than men to take time out of the labour market to meet family responsibilities.

Age-related increments

Seemingly outdated in an era where age discrimination is outlawed, exceptions remain in place in respect of the National Minimum Wage (NMW) legislation. The minimum rates are lower for young workers to help them attain their first steps on the employment ladder before progressing to higher levels of pay as they gain in age. See our factsheet on the minimum wage for more information.

Go to our national minimum wage factsheet

Similarly, age-related pay progression may affect apprentices on government-backed apprenticeships schemes. Apprentices on such schemes are exempt from the NMW until they are 19 (as are those over age 19 and in the first 12 months of their apprenticeship). Prior to gaining entitlement to the NMW, apprenticeships scheme guidance stipulates that they should receive a minimum weekly payment currently set at £80 a week.

CIPD members can find out more on the reward implications of age discrimination legislation from our factsheet.

Go to our factsheet on Age discrimination: reward
policies and procedures

Individual performance-related pay (merit pay)

This approach links individual pay rises with an assessment of an individual employee’s performance by a manager or supervisor. The idea is to encourage employees to perform to the highest level possible – usually against specific individual targets – and to reward high performance levels. These arrangements have attracted criticism from some analysts and some employers are moving towards a broader concept of contribution-related pay. See our factsheet on performance-related pay for more information.

Go to our factsheet on performance-related pay

Team performance pay

This involves linking pay increases to an assessment of performance at team rather than individual level. A variation on the individual performance pay theme, these arrangements aim to encourage particular types of behaviour such as collaborative working. See our factsheet on rewarding teams for more information.

Go to our factsheet on team reward

Organisational performance

Taking the link with performance to its highest levels, organisational performance can be used as a criterion for pay progression (for instance, by taking divisional sales levels into account).

Competency pay

This approach links pay rises to an assessment of employee competencies in a range of areas (focusing on the employee’s input to the job, rather than performance or output). The aim is to encourage and reward the development of particular competencies desired by the organisation, for example customer service or communication skills. Find out more about competency and competency frameworks from our factsheet on that topic.

Go to our Competency and competency frameworks
factsheet

Skills-based pay

Under this system the acquisition of additional skills or specific qualifications levels is linked to pay rises, with the aim of encouraging employees to undertake appropriate study or training and equip themselves with the skills and knowledge deemed important to meet business needs.

Market rates

Pay increases can be pitched to keep pace with rates for similar jobs or regional pay levels in the external labour market, typically involving the use of salary surveys. Employers may choose to position themselves at particular strategic points – for example they may wish to keep in line with the upper quartile of external pay levels with the aim of attracting and keeping above-average staff in their organisation. For more information see our factsheets on market pricing and local pay.

Incidence of pay progression arrangements

In practice, many employers choose to use a combination of factors in determining employees’ pay progression. According to the CIPD’s 2008 annual reward survey, ’The most popular approach (76%) to progressing someone along their pay grade is to use a number of factors (what we call a combination approach)’ – for example, a mix of individual performance and market rates.

See the full results of our reward management survey

The remainder of employers use solely one factor, most commonly individual performance (10%) or length of service (6%).

Among employers using a combination approach towards pay progression, the criteria included are:

Approach	Percentage of respondents
Individual performance	87%
Market rates	69%
Competency	54%
Organisational performance	51%
Skills	38%
Team profit / performance	23%
Length of service	17%

An associated report looks in more depth at differing arrangements in place in the private and public sector¹: ‘Progression in the private sector is generally driven by a combination of organisation, team and individual performance, skills and competencies, and market rates’, it concludes. By contrast, in the public sector (and the voluntary sector)’service is the main criterion, followed by individual performance, with the other influences all being relatively unimportant’.

Trends across sectors

Nearly one third of employers (31.5%) had made changes to their pay progression arrangements during the previous year, according to the latest IRS survey of HR prospects2.

However – in a similar vein to the survey’s findings on pay structures – this headline figure masks significant differences between sectors. As a result of major pay and modernisation projects affecting large parts of the public sector, changes to pay progression arrangements are far more common for public sector employers (occurring in 50% of organisations surveyed) compared with elsewhere in the economy.

Controlling pay progression

While modern pay structures often aim to allow extensive flexibility and wide scope to reward higher levels of performance or contribution, there is an enduring need to control overall paybill costs.

Under service-related pay progression arrangements, a good degree of control is built into the system as each individual can only achieve one increment each year, up to a set level. Nevertheless, problems of high paybill costs can occur even in such regulated systems, given that they effectively guarantee progression to the maximum of the pay scale. This is especially problematic at times of low staff turnover when most staff are clustered at the top of each pay grade.

However, the issue of controlling pay progression is particularly pertinent in more flexible pay structures, such as broadbanding.

A variety of techniques may be used to help control pay progression including the following.

Using target (or reference) points

Under individual performance (merit) pay arrangements, for instance, it is common for ‘satisfactory’ performers to progress to a target point in their pay ranges. This target point tends to be set around the middle of the range among private sector employers but at higher levels – closer to the top of the range, perhaps around 80% – in the public sector.

Zones

The use of zones would involve dividing each pay band into, say, three zones and specifying that individuals could only progress to the next zone up for some exceptional reason. This is particularly useful for employers with a broadband system to limit the extent of pay progression.

Payment of cash bonuses

For example, a reference point could be set at some point in the pay range beyond which cash bonuses might be paid rather than consolidated increases.

Issues with pay progression arrangements

When determining or reviewing pay progression arrangements, the issues to be considered include the following.

Matching pay progression arrangements with business needs

Any approach towards pay progression needs to fit the organisation’s business strategy and ethos. For example, team-based pay progression might be preferred to the use of individual performance-related pay in a business that is highly dependent on collaborative working.

Equality in arrangements

It is important to review equality issues in areas such as gender and age to ensure that arrangements for pay advancement are free of unfair and/or unlawful bias. For example, if using a service-related system, it is recommended that employers should limit these to a maximum five-year period to avoid potential discrimination against women who may have taken career breaks to raise a family. See more information on equality in reward in our factsheet on equal pay.

Go to our factsheet on equal pay

Employee communication

Devising and changing pay progression arrangements – along with associated pay structures where appropriate – is usually a complex task. Therefore the need for effective employee communications and involvement during such exercises is paramount, with particular attention paid to the line managers who will be closely involved in implementing the systems. For more information see our factsheet on communicating with employees.

Go to our employee communication factsheet

CIPD viewpoint

Approaches to pay progression need to be capable of meeting both the business needs of the organisation (and to be sufficiently flexible to adapt as those needs change), as well as the aspirations of employees, in a fair and non-discriminatory way. Employers should review their systems of pay progression on a regular basis and consider alternative approaches if existing arrangements are no longer able to meet these needs.

References

OFFICE OF MANPOWER ECONOMICS and CHARTERED INSTITUTE OF PERSONNEL AND DEVELOPMENT. (2008) Public/private approaches to pay and progression [online]. Available at:
http://www.ome.uk.com/downloads/Pay%20and%
20Progression%202005%20Website%20Version.doc
WELFARE, S. (2007) HR prospects 2007: reward strategies, equal pay and pensions. IRS Employment Review. No 665, 15 June. 6pp.

Pay progression