The ultimate guide to building an effective pay framework

Attract top talent, retain star employees, and promote fairness and transparency within your pay and reward system- these are the challenges facing organisations in today's competitive recruitment market. But how can you ensure your salaries are competitive, your team can manage the cost of living, and your pay and reward system is transparent and fair? Discover the answers in this comprehensive guide.

These are questions that we’ve been getting asked more and more by our clients over the last two years. And they’re great (and tough) questions.

We’ve seen significant growth in clients looking for support in reviewing their approach to pay and reward. Often armed with the above questions, they’re looking for help in recruiting, retaining and motivating their people. The vast majority of organisations that we work with at Atkinson HR Consulting are charities / non-profits. Many are feeling squeezed, especially when trying to recruit roles where they may be competing with private sector organisations.

Two of my brilliant colleagues (Eleanor Walker and Vicky Hossack) recently facilitated a session for NCVO members on ‘how to support and retain your staff through the cost of living crisis’. They talked about what charities can do to prevent staff from leaving for higher-paid roles elsewhere, and shared ideas around flexible working, benefits, progression and organisational culture.

I thought it may be helpful to share some of the key themes and discussions that come up with organisations when tackling these challenges.

There’s no such thing as a perfect pay framework

Our work with clients on pay and reward always focuses on finding the best solutions for them. I’m a big believer that pay systems need to be aligned to the objectives, values and culture of the organisation – especially for small- and medium-sized organisations. Often there are tensions to be managed and important questions to be addressed in designing a salary structure. For example, these can include:

• What’s more important – that people feel fairly paid compared to colleagues internally or compared to people who do a similar job in another organisation?

• Should pay be a reflection on the requirements of the role or on the contribution or value of the individual?

• Should elements of pay be linked to performance, and if so individual or collective?

• What is the balance between structure and rigidity (the rules) versus flexibility and freedom for leaders to make individual choice or exceptions to meet business needs?

In every single pay structure we’ve ever designed there have always been compromises. We start off focusing on objectives and design principles and have honest conversations about where priorities lay. We’ve never yet been in a position where every single stakeholder agrees on all of the above questions. However, if you are upfront and honest about your objectives and principles you are much more likely to build understanding about why your pay structure is designed the way it is and what you are striving to achieve.

Pay doesn't drive employee motivation

Dan Pink makes a very compelling case in his book Drive and this Ted Talk that in a 21st Century, complex work environment financial incentives do not automatically equate to greater motivation or higher performance. He argues that you need to pay people fairly, and that if you don’t it can be a demotivator. However, to build genuine employee engagement, motivation and high levels of performance you need to focus on intrinsic motivators (autonomy, mastery and purpose) rather than extrinsic motivators (pay).

This goes against traditional thinking that if you pay your people better they will stay or that if you pay top rates you’ll automatically hire the best. The reality is that far too often leaders or managers automatically blame pay for staff churn, when more often than not the problem (and solution to employee motivation) rests with culture.

To be clear, having a well-designed job and lots of intrinsic motivation isn’t an excuse to pay poorly (especially during a cost of living crisis). In the broader context of this blog, I think that you should be keen to get your pay system right (and fair), but that you shouldn’t be lulled into a false sense that paying well will solve all your issues. Organisations should invest resource and energy into creating an environment where people can be experts in their job, where they understand how their work makes a difference and where they have control over their own processes. These things will make a significant difference in recruitment, retention and engagement; much bigger than, for example, the difference between being a mid-range payer and a top-quartile payer.

Considering your total reward strategy

Linked to the above, I think it’s increasingly important to view reward in a much broader sense, especially in a post-Covid world. Yes, pay is important (especially in the midst of rocketing inflation and a cost of living crisis). But over the past two years, it’s increasingly common to hear people talk about the importance of employee benefits such as great holidays, flexible working, enhanced parental leave, wellbeing support, pension etc. Perhaps in some ways, the global pandemic has helped give some people a different perspective on the role, and balance of work in their life.

HR Magazine reported in April last year that over a third of UK employees were “likely to move” because of their (newly acquired) ability to work remotely. At around the same time, Microsoft in their global Work Trend Index said “we’re all learning as we go, but we know two things for sure: flexible work is here to stay, and the talent landscape has fundamentally shifted. Remote work has created new job opportunities for some, offered more family time, and provided options for whether or when to commute”.

People are making more informed and balanced choices about the employers they want to work for based, yes, on pay, but increasingly also on the wider employer brand and employee incentives available. This does of course vary depending on profession, demographics and career stage, but I think broadly it is a trend we’re likely to continue to see growing over the coming years.

Pay Equity

Importantly, conversations about fair pay feature prominently in conversations with clients.

Last year, according to the Office for National Statistics, the UK gender pay gap rose from 14.9% to 15.4%. Ethnicity pay gap reporting is still not mandatory in the UK. Data from the Annual Population Survey 2021-2019 shows an ethnicity pay gap of 2.3%. However, this does not truly reflect significant disparities in location (23.8% in London) or across different ethnic backgrounds (16% Pakistani and 15% Black African). Clearly, there’s a huge amount of work needed to eradicate pay gaps, even (and especially) in values-driven organisations.

We conduct, as standard, analysis on equality impact when we work with clients to review their approach to pay and reward and promoting pay equity is always an objective that our clients agree should underpin their pay system. Generally, introducing clearer rules, greater pay transparency and a better compensation structure come with the benefits of reducing opportunities for bias and therefore reducing opportunites for unequal pay.

Other things that can help to reduce opportunities for bias and pay inequality include:

• Pay transparency - always publishing the pay range or salary in job adverts #ShowTheSalary;

• Closing the pay gap - making sure you’re not reinforcing historical inequalities by asking for current salary in job interviews;

• If you have flexibility for pay negotiations ensuring it is within a clear framework with set parameters. We know that women and people of colour are less likely to negotiate and ask for higher salaries;

• Stripping back the person spec. We know that women and people of colour deselect themselves for senior roles when specifications are long and excessive;

• Proactively identifying opportunities for progression and development opportunities for under-represented groups.

Benchmarking pay scales is helpful, but not the be-all and end-all

As part of our pay and reward work, we’re often asked to carry our benchmarking for clients to assess where they sit in comparison to ‘the market’. There are some really useful tools publicly (and freely) available, for example, the Harris Hill Salary Survey for charities. There are also some useful benchmarking reports available within sub-sectors of the Voluntary Sector. Alongside this, we will often benchmark against a ‘basket’ of comparable roles advertised over a 12-month period.

There are obviously benefits of benchmarking. It helps spot any anomalies, and there are occasions when it’s been useful to identify roles where market factors have been playing an interesting or unusual role in driving salary disparities. It also helps organisations to understand broadly where they sit in terms of other organisations that may be ‘competing’ for similar talent.

However, there are also limitations. It is practically impossible to factor in the broader benefits and reward package. It is also increasingly harder to weight according to geography because of remote or hybrid working. And the key question is to what end? If the purpose of benchmarking is to guide a reward strategy in its broadest sense, then great. However, if benchmarking is used with an agenda to ‘make a case’ for a pay award for certain roles, this can often be unhelpful and problematic.

So, if you’re pondering your organisational approach to pay and reward and want to reflect on whether it’s working, I’d encourage you to reflect on the following ten questions:

1. What are you trying to achieve (recruitment, retention, engagement etc) and does your reward framework help or hinder you?

2. If you have issues in these areas, are pay grades really to blame or is it something else? What is your evidence?

3. What are the design principles underpinning your compensation structure?

4. How transparent are you about pay and reward? If ‘not very’ then what do you have to hide?

5. What does the picture look like when you factor in your employee benefits?

6. Do colleagues feel they’re paid fairly in comparison to each other and do they feel like they get a fair deal overall?

7. Do you have a clear process around pay progression and do people really understand what they need to do to progress (within their role and into different roles)?

8. Do you effectively communicate your employee benefits to (current and prospective) employees?

9. How do you sell your employer brand, values and culture to potential job candidates?

10. What research / data do you need to inform your reward strategy and spot any anomalies or outliers? (but not to pursue individual agendas).

If you’d like any advice or support in reviewing your approach to pay and reward, please feel free to get in touch with us at Atkinson HR Consulting.