5 Elements of an effective salary system
When you recruit, do you negotiate a salary each time that is attractive to the candidate and fits within your budget? And then, as these decisions are made on a case-by-case basis, do you rely on a contractual term that swears each new recruit to secrecy?
What's wrong with this? Maybe nothing, if it works. However, any strategy that relies on employees not discussing salaries with each other and threats of discipline if they do, is not really viable in the long term. It also implies that something is not quite fair.
Here is a test. If a list of employees and their pay was accidentally left on the photocopier, would it just be embarrassing or a major problem?
It is commonly accepted that pay is important, along with a number of other benefits and experiences an organisation provides its employees. One of the elements we seem to find is less commonly accepted (despite the research) is how important it is when an organisation gets it wrong. We’ll touch more on this later.
So how does an organisation get it right?
Often, they start by doing some benchmarking, understanding where their salaries sit in relation to the rest of the market. A pretty big task when you think about it. Firstly, you must make sure your job is broadly the same as that being reported in the salary data. While you may have a job called Marketing Assistant, this may mean very different things in other organisations. Defining jobs carefully and understanding how they relate to each other in your organisation are necessary first steps. Then comes matching them carefully with the jobs in the salary survey data.
In our experience matching the job and establishing the value of jobs in the business relative to each other is essential; it is internal relativities that cause more angst and staff turnover than external relativities; hence it is a critical element that needs to be considered in conjunction with salary benchmarking.
Let's leave out award covered roles for now, although they can be included if desired, and talk about those positions where there is a degree of discretion as to how much can be paid. An effective salary system needs to meet a few criteria.
Jobs need to be defined and assessed according to their importance to the organisation. This then establishes a "pecking order" which is acceptable and is normally done using some form of job evaluation. This is assessing the job only – not the person in the job.
This stage then establishes what the market rates are for the jobs in your organisation. This again is based on the jobs not the people.
Reward for performance
Now we look to the people in the jobs and ensure that the salary is related to their performance. This is important when they are first recruited, although more difficult as you may not have a clear idea on their performance. It becomes much more important with their regular reviews.
Ease of administration
Any system that incorporates the above needs to be maintained in a consistent way without becoming an administrative burden. This means it needs to be kept simple and well documented. It also means all employees need to understand it and managers need to be able to apply it.
Fair and equitable
Any salary system, to be accepted and effective needs to be fair and equitable. That is, although not everyone will be happy with their level of pay (we can always spend more than we earn) they should accept that it is a fair reward for what they do. If this is not the case, pay will always be an issue with them and it will be difficult to get to a stage where they are totally satisfied with their job or the organisation.
There is a big incentive for organisations to get this right. At a minimum, you should be asking yourself the question when it comes to salary review time — “are you giving an increase to the right people?” And “how will you explain it?” Does it create more dissatisfaction than satisfaction?
Research, most notably that by Frederick Herzberg, tells us that pay is not usually a motivator but pay that is considered to be inadequate or unfair is certainly a demotivator. He labelled these types of factors "hygiene factors"; they had to be in place before people could be motivated. More recent studies into employee satisfaction tend to confirm these findings.
So if you have a blanket approach to salary reviews each year, for example CPI or an anticipated 3.2% that does not appropriately take into consideration elements such as individual performance or internal relativities—is it possible that your 3.2% across the board retains the people you don’t want to keep and accelerates the departure of the ones you should be keeping?
Time invested in establishing and managing a salary system provides significant benefits to a business. It will stop the last minute race against the clock to negotiate an “appropriate” and “confidential” salary with a new starter which will always need to be maintained in some special way each salary review AND it will free up managers and their staff to focus on activities that deliver results rather than questioning their pay.
In the interests of inspiring businesses and empowering managers so that everyone who works for them gets some enjoyment, fulfilment and satisfaction from their work; this is a topic Horizon believe all businesses need to get right. This does not have to be a lengthy or arduous exercise, and once in place it can save time and deliver benefits on an ongoing basis.
If you’d like to find out more about how you can implement the 5 elements of an effective salary system for your business, please get in touch to find out more about how we can help.
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