A benchmarking and information resource in respect of current and emerging practice in UK reward management
Reward and pay are important factors in the process of attracting, retaining and engaging employees. There's a range of options available for organisations to reward their staff and recognise their contribution, each with their own opportunities and risks, but the most effective reward packages will be aligned with the business and staff needs, and reflect the organisation’s purpose and performance.
This factsheet explores the purpose of reward and how employee responses may vary depending on different contexts and circumstances. It introduces pay structures and levels, the considerations surrounding pay awards and the factors affecting pay progression. It also describes variable pay – from cash bonuses to incentives – as well as outlining some UK legal issues such as equal pay, the national minimum wage, national living wage and executive reward. Finally, it outlines the role of employee benefits, non-financial rewards and total reward.
Employers need to align the rewards their employees want with the needs of the business. There are various elements to reward and it is important to choose the appropriate mix of base to variable pay, fixed to flexible benefits and financial and non-financial rewards. Employers should also be aware of the various ways that individuals respond to pay, and the opportunities and risks involved when making decisions about rewarding and recognising individual and collective contribution.
An organisation’s reward policies reflects its values, so it’s important that an appropriate communications strategy is adopted to explain what staff behaviours and performances are being rewarded, how and why.
What are reward and pay?
The term ‘reward’ generally covers all financial provisions made to employees, including cash pay and the wider benefits package (pensions, paid leave and so on). It can also include wider provisions for employees, with the term ‘total reward’ encompassing non-pay benefits.
Pay may be divided into two categories:
- base (or fixed) pay - guaranteed cash wage or salary paid to employees for doing their work for a contracted period of time
- total earnings – base pay plus additional variable earnings such as bonus payments or overtime earnings.
Pay definitions vary. For example, certain location allowances might be seen as part of base pay by some employers, while others may see it as variable pay and exclude it from base pay.
Other terminology may also be used. ‘Compensation’ for example is usually taken to refer just to financial rewards (base pay and earnings) while ‘remuneration’ might be used interchangeably with ‘reward’ to mean the wider benefits package.
Managing pay and reward
The main reason to offer pay and benefits is to attract, keep and influence staff. Traditionally, salaries were used to attract people to an organisation, while benefits helped keep them there, and bonus and incentive schemes motivated them in their work. However, thinking about which parts of reward are best suited for recruitment, retention and motivation has changed. Listen to our podcast on the changing landscape of reward.
Recent research indicates 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 personal circumstances. In certain situations, individuals may not consider the financial elements of a package particularly important. For instance, people at the beginning of their career may be more interested in gaining access to training and career development. Similarly, individuals may be willing to work for lower pay rates (or even volunteer) if they have a strong attachment to the mission of an organisation, such as a political party or a charity. Our Employee Outlook: Focus on employee attitudes to pay and pensions survey report examines UK employees’ opinions and attitudes towards salaries and bonuses.
Employers should find out what attracts, retains and inspires individuals and explore how best they can meet these needs - as well as meeting the requirements of the business within the appropriate legal and regulatory environment. When creating a reward package, it's also important that organisations integrate the various elements so that they support, rather than contradict, one another.
Recently, behavioural science has offered up useful insights about how individuals may respond to various financial and non-financial rewards. Employers should use the lessons from behavioural science when designing, implementing and communicating its reward package. Find out more in our report Show me the money! The behavioural science of reward.
A number of organisational risks are involved when making decisions on how employers reward and recognise individual and collective contribution. For more information, see our Reward risks survey report.
Organisations should establish a reward strategy that clearly articulates the aims of the various reward elements and how they are integrated. The strategy should be complemented by appropriate communications to explain to staff what behaviours and performances the organisation is rewarding, how, why and when.
Determining base pay and total earnings
Pay structures provide a framework for valuing jobs and understanding how they relate to one another within the organisation and to the external labour market.
Our Reward management surveys illustrate that a wide range of different types of pay structures exist, linked to varying organisational needs and objectives, including:
- individual pay rates, ranges or ‘spot’ salaries
- narrow graded pay structures
Pay structures may also need to allow for certain additional elements other than basic pay rates, for example the inclusion of location allowances. Find put more in our pay structures factsheet.
There are various approaches to setting pay levels or ranges. For example, job evaluation is an important tool for setting pay rates among public sector employers, whereas market pricing tends to be more influential in the private sector.
Where market rates are used, employers need to determine where to pitch in-house rates (for example, at the median or upper quartile). See more in our factsheet on market pricing and job evaluation.
When setting the size of the overall pay review budget for annual pay increases - which often 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 include:
- ability to pay
- market rate changes.
There are variations by sector. For instance, in the public sector the key factor is the government’s pay policy together sometimes with union pressure, whereas the latter factor is rarely an issue for many private sector companies. Our report Megatrends: have we seen the end of pay rise? looked at UK pay and inflation trends, while our quarterly Labour Market Outlook reports look at pay forecasts for the coming year.
Our guide on The pay review process has more on setting pay review budgets and determining the level of individual and collective pay rises.
Individual performance, competency and skills are commonly used factors for moving individuals along salary bands or ranges. A hybrid approach which bases progression on more than one factor is typical. It might involve an assessment of what is achieved by individual employees against the backdrop of what is happening in the wider labour market. Find out more in our factsheet on pay progression.
Many organisations expect ‘satisfactory’ performers to progress to a target point in their pay range. Among private sector service employers the target point is often the mid-point in the range, while in the public sector it tends to be close to the top of the salary scale. In the voluntary and manufacturing and production sectors, employers tend to be more evenly split as to whether the target is at the mid-point or towards the top end. Read more in our performance-related pay factsheet.
Variable pay: cash bonuses and incentives
Our Reward management surveys show the widespread use of bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonuses). However, there are again variations by sector, with such schemes more widespread in the private sector. Many employers have more than one bonus or incentive scheme.
Among those employers offering a performance-related reward scheme, the most common individual performance-related variable schemes are individual bonuses and sales commission, while the most common group performance-related plans are profit-sharing and gain-sharing. See more in our factsheet on bonuses and incentives.
The advantage of variable pay schemes is that they can link earnings closely to desired performance and, in theory, only pay out when there is reason to do so. Variable elements of pay does not generally feed through into other elements, such as overtime or pension contributions, and so creates no additional on-costs.
The legal position
In all pay and reward policies, UK employers must meet legislative requirements, for example, provisions on equal pay and the National Minimum Wage.
Equal pay is an aspect of sex discrimination law giving the right for men and women to be paid the same for the same, or equivalent, work. However, despite legislation, there are still significant gender pay differences. From April 2017, large employers are required to report annually the size of their gender pay gap.
The National Minimum Wage applies to all workers age 16 and over. There are currently four categories covering apprentices, workers aged under 18, those aged 18 to 20, and those aged between 21 and 24. In April 2016, a new rate (the National Living Wage) was introduced for those aged 25 or over. Our report Weighing up the wage floor: employer responses to the National Living Wage examined the expected responses between small and large employers, and across different sectors of the economy. The Summer 2017 issue of our Labour Market Outlook found that the main response from employers to the National Living Wage was to absorb the cost.
While not a legal requirement, over 3,700 organisations employing 150,000 workers have signed up to the voluntary Living Wage.
The UK tax position on staff benefits, for example tax relief on pension contributions, can change. For up-to-date information, see the HMRC website.
HR professionals need to be aware of the regulatory background and corporate governance standards when setting rewards for senior employees, including proposals to publish chief executive pay ratios.
Our report Executive pay: review of FTSE 100 executive pay packages looks at how CEO pay in the UK’s largest firms changed between 2015 and 2016. It found that while there was a significant drop in CEO pay, it would still take the average UK full-time worker on median full-time earnings, 160 years to earn what an average FTSE 100 CEO is paid in just one year. Our principles of executive remuneration framework offers guidance to help practitioners think through challenging executive reward issues.
We’ve also produced research examining CEO reward from a behavioural science viewpoint, and its impact on the rest of the workforce. Read our reports The power and pitfalls of executive reward: a behavioural perspective and The view from below: what employees really think about their CEO’s pay packet.
The role of employee benefits
Many employers offer a wide range of benefits from traditional items such as paid leave and occupational pensions to newer elements such as concierge services.
There are various reasons why benefits are offered, including to: match market practice, provide workers with some measure of health or disability security, or retain employees. Some benefits, can be tax-efficient methods of remuneration via salary sacrifice provisions. Share schemes are one specific option for attracting, retaining or motivating senior managers as well as employees. See more in our employee benefits factsheet.
Flexible and voluntary benefits schemes
Flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') allow employees to vary their pay and benefits package in order to satisfy their personal requirements.
Voluntary benefits (where employers arrange for the purchase of goods and services, often at a discount, by employees) are more widespread than flexible benefits, partly as they have no cost to employers beyond set-up and administrative costs.
Read more in our factsheet on flexible and voluntary benefits.
Non-financial rewards and total reward
While pay and benefits are important, and getting them wrong can have adverse consequences, they are not the only rewards that employers should consider. Research shows that non-financial rewards can be just as important. These include:
- good performance management and appraisals
- opportunities for personal and career development
- flexible working (such as working from home)
- being involved in decisions that affect how and when employees do their work
- recognition, such as through an ‘employee of the month’ award or team-based events.
Reward strategies that mix non-financial provisions with pay and benefits are often known as total reward approaches. Read more in our factsheet on strategic reward and total reward.
Useful contacts and further reading
ARMSTRONG, M. (2015) Armstrong's handbook of reward management practice: improving performance though reward. 5th ed. London: Kogan Page.
INCOMES DATA SERVICES. (2011) Wages. Employment law handbooks. London: IDS.
LIVING WAGE COMMISSION (2016) Closing the gap: a living wage that means families don’t go short: the final report of the Living Wage Commission.
PERKINS, S.J. and WHITE, G. (2016) Reward management: alternatives, consequences and contexts. 3rd ed. London: Chartered Institute of Personnel and Development.
ROSE, M. (2014) Reward management. London: Kogan Page.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
BROWN, D. and REILLY, P. (2013) Reward and engagement: the new realities. Compensation and Benefits Review. Vol 45, No 3, May/June. pp145-157.
IRVINE, D. (2013) Rewarding with recognition. Benefits and Compensation International. Vol 42, No 6, January/February. pp27-29.
FARAGHER. J. (2016) Covering the cost of the national living wage: is it fair or legal to cut back perks? Employers’ Law. June. pp12-13.
National living wage: how to steer clear of problems. (2016) Employers’ Law. February. pp12-13.
PISSARIS, S., HEAVEY, A. and GOLDEN, P. (2017) Executive pay matters: looking beyond the CEO to explore implications of pay disparity on non-CEO executive turnover and firm performance. Human Resource Management. March-April, Vol 56, No 2. pp307–327.
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This factsheet was last updated by Charles Cotton.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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