CIPD - Pay and reward: an overview

Pay and reward

Revised March 2008

This factsheet gives introductory guidance. It:

examines the aims of reward
considers the various forms of reward
includes the CIPD viewpoint.

Why reward people?

Historically, the aims of reward were to attract, retain and motivate staff. Salaries were what attracted a person to an organisation, benefits kept them there, while bonus and incentive schemes motivated them. Reward was regarded of consisting of three distinctive parts:

Remuneration - (or compensation to give it the North American term) covering such aspects as job evaluation, salary structures and incentive schemes.
Benefits - which tend to be offered to all employees irrespective of their grade, such as paid leave, employee assistance programmes or Christmas parties.
Perquisites - ('perqs', but often written ‘perks’) which are benefits that tend to provided to discrete categories of employees, such as a company car/car allowance, private healthcare or concierge service.

More recently, this divide between which parts of reward are best suited for recruitment, retention and motivation has broken down. Research reveals that individuals are attracted, retained and engaged by a whole range of financial and non-financial rewards and that these can change over time depending on their personal circumstances - see our factsheet on total reward.

Go to our factsheet on Total reward

It may be that the financial elements of a package are not considered particularly important by individuals in certain situations. For instance, people at the beginning of their career may be more interested in getting access to training and career development. Similarly, individuals may volunteer their services for free if they have a strong attachment to the mission of an organisation, such as a political party or a charity.

It is important for employers to find out what attracts, retains and engages individuals and then explore how best they can meet these needs as well as meeting the requirements of the business within the appropriate legal and regulatory environment. It is crucial that when creating an employer offering, organisations try to ensure that they align their practices to the needs of the business and employees, and integrate the various elements of the reward package so that they support, rather than contradict, one another.

Reward strategy

It is important to establish a reward strategy which clearly articulates the aims of the various reward elements, integrates them in a coherent way and tells employees what they can expect to receive and why. This strategy needs to be written, communicated and understood throughout the organisation. It is the yardstick by which reward elements are measured and evaluated and manages the expectations of all employees. Without an articulated reward strategy, the various elements will at best seem like individual initiatives and at worse employees will be left to form their own opinions about what the organisation is trying to achieve. To help employers create an appropriate reward strategy, CIPD members can see and use our tool Reward strategy: how to develop a reward strategy.

View our Reward strategy tool

However, on its own, a reward strategy is not going to be effective unless the organisation has the ability to execute it. Research for our annual reward management surveys shows that the most common causes of problems in implementing a reward strategy effectively are the skills and abilities of line managers to actually implement the strategy as intended. Attitudes are also an issue, with a sizeable proportion citing lack of support from top managers, front-line managers, staff and unions. The other inhibitors are process related, either poor communications and/or lack of support systems. It is important to address these when creating or amending a reward strategy.

See our annual reward surveys

Base pay

How pay levels are determined

Our 2008 reward survey shows that when it comes to determining salary levels, ranges or mid-points, the key factors are:

market rates
ability to pay
job evaluation.

There are variations by sector, for example job evaluation is an important market pricing tool in the public sector, market rates drive salary levels for private sector service employers, while ability to pay is a factor for manufacturing and production firms. By employer size, the views of the owner or managing director are more important in smaller firms than they are in larger firms. See our factsheet on job evaluation for more information.

Go to our factsheet on Job evaluation

Of those who use market rates, research shows that the most common method of getting information to determine salary rates is from pay surveys (international, national, local or job function), reviewing job adverts, national pay research by general HR consultancies or specialist companies such as Incomes Data Services (IDS) or Industrial Relations Services (IRS) and job-evaluated pay databases. For more information on the sources of information that employers use to help determine their annual pay award, see our factsheet on sources of data for dertermining pay settlements.

Go to our factsheet on Basic pay settlements: data sources

When it comes to adopting a market position in respect of base pay, the most popular approach is to try to match the median. While there are variations by occupational group, they are not large, indicating that employers tend to adopt a similar market stance, irrespective of grade. There are variations by sector, for instance manufacturing and production firms are least likely to opt for the upper quartile. For total cash (base pay plus bonus), there is a shift in market positioning with more employers aligning themselves to the upper quartile and being more discriminating, with management and technical/professional occupations more likely to have their total cash pay linked to the upper quartile. However, this is usually stated as being for upper quartile performance, which is much harder to determine than the market level of total cash pay.

When determining rates of pay, employers must meet the requirements of the national minimum wage (NMW), see below. When setting the level of rewards for executive employees (base pay, perqs and benefits), reward practitioners in publicly-owned companies need to pay regard to the UK corporate governance regime, namely: the combined code, The Companies Act 1985, and institutional investor guidelines (such as trade organisations ABI or NAPF, or individual investment organisations such as Hermes). For more information see CIPD reward management¹.

National minimum wage

The national minimum wage (NMW) was established on 1 April and applies to all workers age 16 and over. The NMW rates are expressed as national hourly rates. There are no variations by region, occupation, industry or employer size. Employees cannot agree to accept a rate lower than the NMW. For more information on the three rates, the hourly rates payable, who the rates apply to, and other issues, see our factsheet on the minimum wage.

Go to our factsheet on the National minimum wage

How pay structures are managed

According to CIPD reward management¹ pay structures are 'all about valuing jobs and understanding how jobs relate to one another and he external market. Employees and their individual competence, experience, and standards of performance should fit into, and be valued by the structure.'

CIPD research shows that the more common approaches to managing pay structures include:

narrow graded pay structures – a narrow graded structure is a sequence of job levels. All jobs in a particular level or grade are broadly of equal value to the organisation. Each grade may have a single salary or a range of salaries associated with it. Where there is only a single salary linked with a grade, all employees whose jobs fall in the same grade are paid at the same rate. Where each grade has a range of salaries, the level of pay for individual employees in a grade range could depend on their performance or their length of service.
broadbands – a broad-banded pay structure combines a broader range of jobs within a small number of grades or bands. As a consequence, the range of pay in a band is significantly higher than in a narrow graded pay structure. This can allow pay to be managed more flexibly and salary levels and relativities can readily linked to the market. For instance, under a narrow-graded scheme, employees could only increase their salary typically via promotion to a higher grade.
individual pay rates, ranges or ‘spot’ salaries – an individual job structure places each separate job in its own grade, with its own salary or salary range. In other words, there is only one job to a grade. Such a structure is useful where the job content for individual positions varies widely, or where flexibility in response to rapid organisational change or market-pressure is vital.
job-family pay structure – this consists of separate pay structures for occupational grouping or job families. Job families may be task-based, covering specific workgroups, or generic, covering similar types of work across functions.
pay spines – consist of a series of incremental points stretching from the highest- to the lowest-paid jobs.

Our latest reward management survey (see link above) shows the most popular approaches to managing pay structures are:

individual pay rates/ranges/spot salaries (32% of respondents)
broadbands (28%)
job families/career grades (22%)
pay spines (14%)
narrow graded pay structures (13%).

However, there are variations by sector and occupational group, For instance, pay spines, which provide for a greater degree of control and certainty, are common at all levels in the public sector, while individual pay rates, ranges or ‘spot’ salaries, which allow for greater flexibility, are more common in the private sector. By occupation, individual pay rates, ranges or ‘spot’ salaries are common for senior managers, while clerical and manual grades are more likely to be covered by narrow graded pay structures.

How pay progression and awards are managed

According to our research, when it comes to progressing people along salary bands or ranges, the most common method is a hybrid approach that bases progression on more than one factor. The most commonly used factors are individual performance, market rates and competency, factors which look at what has been achieved and how it has been achieved against the backdrop of what’s happening in the market.

Most organisations expect that ‘satisfactory’ performers will progress to a target point in their pay range. Further analysis reveals that among private sector service employers, the target point is the mid point in the range, while in the public sector the target point is close to the top of the range. In the voluntary and manufacturing and production sectors, employers are roughly split as to whether the target point is at the mid point or towards the top end of the pay band.

When it comes to determining the size of the overall pay review budget, which includes performance-based pay rises as well as general pay structure movement (commonly known as the annual pay award or cost of living uplift), the key considerations are:

organisational performance
inflation
movement in market rates
the ‘going rate’ of pay awards elsewhere
recruitment and retention issues.

Again, there are variations by sector. For instance, in the public sector the key determinant is how much the government gives them and how much the unions will demand while this later factor is not generally an issue for private sector companies.

Variable pay

Short-term bonuses and incentives

Our reward management surveys¹ show the widespread use of short-term bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonus). However, there are variations by sector, with bonus and incentive schemes being more common in the private sector. Of those with a scheme, the most common type is that linked to an individual’s performance, followed by collective approaches, the most popular being those driven by business results (such as profit or revenue targets) and combination schemes (combining both individual performance measures with collective measures, such as unit- or team-based). For more information about the different types of schemes, CIPD members can see and use our practical tool on developing bonuses and incentive pay.

Go to our tool Bonus and incentives

Most organisations have more than one scheme, with the average number per organisation being just under four. The advantages of variable pay is that, in theory, it only pays when there is something to pay out and it is generally not pensionable which means no additional on-costs.

However, again, pay is not the only way to reward or incentivise employees. Many organisations use gift vouchers or arrange trips or experiences, while others find a simple ‘thank you’ from an individual’s line manager or the chief executive can have positive effects. Our 2008 reward management survey (see link above) found that 35% of organisations use a non-cash bonus or incentive scheme. This varies by sector with private sector service employers being more likely to sue such a scheme (46%) and voluntary sector organisations less likely (15%). Private sector organisations are more likely to use a form of recognition that has a cash value (retail vouchers) while the public sector are more likely to use a non-cash form of recognition (such as being allowed to leave work early).

Long-term bonus and incentives

Despite new accountancy regulations to show the cost of employee share schemes on the profit and loss account, share schemes still remain a popular way of attracting, retaining or motivating senior managers (executive arrangements) and employees (all-employee schemes). For more information, see our factsheet on share ownership for employees.

Go to our factsheet on Employee share ownership

Employee perks and benefits

Our reward management surveys show a wide range of perks and benefits on offer to employees, from the traditional such as paid leave, occupational sick pay, occupational pensions and healthcare benefits to newer ones such as on-site massages, concierge benefits and bicycles. Some benefits, such as work-based pensions, are tax-efficient methods of remuneration. There are various reasons for why employers offer employees benefits. For some, it is to match market practice, for others it is to provide employees with some measure of security, such as occupational sick pay, while others use them to retain employees, such as occupational pension schemes. See our factsheet giving an overview of benefits for more information.

Go to our factsheet on Employee benefits: an overview

The same research shows a significant number of organisations examining voluntary and flexible benefits schemes. Voluntary benefits (where employers provide third-party goods and services at a discount) excite most interest. Flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') are formalised systems that allow employees to vary their pay and benefits package in order to satisfy their personal requirements. Flexible benefits are generally only evident in employers with over 1,000 employees, and almost one-fifth of organisations with over 5,000 employees operate them. See our factsheet on flexible benefits for more information.

Go to our factsheet on Flexible benefits

Non-financial rewards

While pay and benefits are important, and getting them wrong can have dire consequences for the organisation, they are not the only rewards that employers should consider. Research shows that non-financial rewards can be just as important. These include:

opportunities for personal and career development
flexible working (such as working from home or flexitime)
being involved in decisions that affect how and when employees do their work
a pleasant working environment
good performance management and appraisals
recognition, such as through an employee of a month award or team-based events.

CIPD viewpoint

Employers need to consider what they are rewarding and try and align what employees want with the needs of the business. There are various elements to reward from the financial to the non-financial and it’s important that employers chose the appropriate mix of base to variable pay, fixed to flexible benefits, and pay to non-pay rewards.

Employers should be also aware of the signals that pay sends out about the organisation, so it is important that this is recognised and an appropriate communications strategy adopted to explain to staff what behaviours, values and performances the organisation is rewarding, how and why.

References

CHILDS, M. and SUFF, P. (2005) CIPD reward management. London: Chartered Institute of Personnel and Development. 1 v. (loose-leaf) (kept up to date with amendments). For more information see http://www.cipd.co.uk/RewardManagement/

Pay and reward: an overview