New technology is helping to cut through the drudge of pay budgeting, says David Shonfield
Case Study: Britannia Building Society
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For many years, determining a pay budget and communicating it to line managers has been one of the most laborious tasks for a reward manager. It is also the one by which the reward department’s contribution is most often judged.
A process that was once enormously time-consuming and error-prone has become straightforward with the use of spreadsheets and email, and is now set for further rationalisation amid software development.
But all this does not mean managing pay is now simple because few issues have changed. And the fact that a much more sophisticated approach is now possible places different demands on compensation managers, both in terms of drawing up the budget and in communicating it to line management.
Organisations, for example, naturally look at both the cost-of-living and at the market, but when it comes to drawing up a budget, it should be remembered that changes in market rates of pay themselves reflect inflation. Similarly, estimates of competitors’ future pay adjustments should also take account of inflation prospects.
There is also a need to look at several sources of market information, not just one survey, remembering that comparisons that used to be appropriate may no longer apply.
Direct pay comparisons need to be relevant to the category of staff involved. Local comparisons should suffice for less-skilled staff and employers should always remember that their pay rates are often determined by large national organisations. For others, they need to look much wider. Comparisons also need to take timing into account such as when competitors are due to increase their pay, or when the minimum wage is set to rise.
The cost of built-in progression and promotion is a more complex issue. Stephen Brookes, a member of PA Consulting’s managers’ group, argues that: "Managers are often unaware of the consequences of a pay review, especially in the public sector. Because there is movement up the scales as well as scale movement, they often underestimate the implications of what they do."
In theory, service-related or performance-related pay systems ought to pay for themselves with people leaving higher up the scales and being replaced by staff on lower salaries. In practice, staff turnover doesn’t work like that, and with market-related pay there is often accelerated progression for new recruits, which can have a major effect on pay costs over one or two years. So a review of recruitment plans and staffing levels is a critical part of the budget process.
IT developments have made it possible to build in elements that previously depended on estimates or even guesswork. "Technology is critical in allowing HR departments to conduct better pay modelling, and thus to target the available money more effectively when it comes to pay reviews," says Brookes.
Software now available allows managers previously unprecedented scope to model both external and internal factors, including survey data and different pay and staffing options. It also allows for both a more controlled and a more flexible relationship with line management in the pay review process. The options are no longer a crude centralisation or complete devolution.
Steve Watson, director of Rewardworks, says: "You have to let the line manager make the ultimate decision, but within the bounds of reasonableness. Recommendation is given but you make the line manager commit to it. You can provide a limited range of options, or you can state an expected norm."
Where performance pay is concerned, he explains: "Five point scales have the advantage of encouraging line managers to do what is desirable. You want people to feel OK about being in the middle, not average, but fully competent. You then can put a small group of people in superior ranges.
"Line managers get scared by high percentages, but if you’re going to motivate the best people and move them though the scales as they expect, then you must move them up significantly. The key point to remember is that it is not the people in the superior range that are the cost. The cost area is the bulk of people on the market rate."
How far line management should be given the scope to model and decide their own options is a matter of debate. Ann Fitzpatrick, HR and payroll consultant of systems provider Northgate Information Solutions, says: "Line management has much more desire to know what’s going on at the coal face." But she points out that there is still a high degree of central control when it comes to decision-making.
This should free up reward managers to make a more strategic contribution. But if this is to mean anything, managers need to ensure that they take advantage of the capacity of these systems both to educate line managers and to share not just data, but information and knowledge.
Factors in pay design
* Current business performance and outlook.
* General business outlook.
* Ability to pay.
* Relevant pay comparisons: local, national, business competitors.
* Likely pay adjustments by competitors.
* Current inflation and inflation forecasts, for example, from the Treasury.
* Future increases in minimum wage or relevant agreements.
* Recruitment and retention, especially for key staff.
* Possible changes in staffing levels.
* Cost of progression or promotion.
* Any anomalies to be addressed such as equal pay.
* Balance between general and individual awards if applicable.
* Impact on other costs such as pension provision.
Case Study: Britannia Building Society
Britannia Building Society has given its line managers much greater discretion over how the pay budget is allocated in recent years.
Britannia’s pay structure, introduced in 2002, has six bands with wide ranges covering everyone right up to the executive directors. Pay is determined by individual contribution which is based on four main factors: behaviours; knowledge and skills; objectives; and role in the organisation. The level of contribution has four ratings: requires improvement; requires development; fully effective; and exceptional.
The process for the January pay review begins in August with an assessment of external data such as pay trends, market information, Treasury economic forecasts and so on. This leads to an estimate to the board and unions of the total pay pot.
Line managers are emailed with an Excel spreadsheet providing information for their group of staff. Louise Baker, head of reward, says: "The technology is not as good as we would like it to be but we provide advice about how to allocate increases, and it allows line managers to test out different scenarios."
There is also guidance on what is a normal increase for the different levels of contribution but decisions ultimately rest with line managers. Last January, for example, the pot was worth 3.25% of the pay bill, but managers had the freedom to allocate increases to uncapped percentages depending on individual contribution.
With this devolved approach, reward managers need to ensure that line managers are alert to specific issues, such as equal pay. Although formal equal pay audits have been carried out, line managers are also provided with both statistical information and guidance. The firm has a team challenge process, in which line managers meet with their peers to test each other’s recommendations every year.