Issues and trends in pay and benefits practice for HR professionals in the UK

The Chartered Institute of Personnel and Development released the findings of its fourth annual reward management survey in February 2005. The results identified a number of significant issues and trends in pay and benefits practice in the UK.

Findings from the fourth annual 'reward management' survey were released by the Chartered Institute of Personnel and Development (CIPD) at its annual reward conference in February 2005. The CIPD, which has over 120,000 individual members, is the leading professional institute for human resources (HR) and personnel managers in the UK. Its survey was based on responses from 477 organisations across all sectors, with around 1.5 million employees, and formed a comprehensive investigation of developments in both pay and benefits provision.

The results highlighted a growth in the reward function within organisations, but suggested a strategic role remained somewhat limited, particularly in terms of equal pay. The survey also showed a continued trend to more flexible pay structures and a diminishing role for collective bargaining.

Strategic reward?

Approximately one-third of organisations in the sample reported having a separate 'reward' (pay and benefits) function, dealing with issues such as executive pay, equal pay and occupational pensions, though the figure is higher for larger firms and those in the private sector. The survey results show an expansion in the numbers of dedicated reward staff, with 41% of organisations reporting an increase, since 2002, and one in five expecting this to continue. The staff earn significantly more (up to 32% more at senior level) than equivalent general HR practitioners. This might suggest that the reward function has a more complex and strategic role, for example in terms of managing costs, incentivising performance and maintaining labour market competitiveness. However, only 45% of employers have developed, or are even in the process of developing, a written reward strategy linked to business and HR needs. Even then, communication problems are evident, especially in terms of involving managers, staff and their representatives. There is also a large 'say-do gap', with time for strategy crowded out by the demands of routine administration. About one third of employers with a reward strategy fail to assess whether it is effective.

As a result, a number of initiatives remain under-developed. First, there is the concept of 'total reward', which goes beyond pay to emphasise the importance of managing and communicating employee benefits, both in quasi-financial terms (such as holiday leave) and in terms of the broader working environment - learning and development, work-life balance, management styles and employee involvement. Only three in ten organisations have adopted such an approach, often where they have had difficulties in recruiting and retaining staff. Second, nearly half (47%) of employers have not carried out an equal pay review (EPR) or have no plans to do so in the near future. This is despite increased awareness and activity in the area of equal pay, linked to government initiatives. For example, the Women and Work Commission will report later in the year on measures to strengthen equal pay legislation, including the case for mandatory EPRs. The main reasons given were that the organisation assumed existing pay systems to be non-discriminatory (62%), that an analytical job evaluation scheme was in place (27%), that top management did not see the need (24%) and that there was a lack of time (16%). Dianah Worman, CIPD diversity adviser, commented that 'failing to carry out an equal pay audit will block the realisation of the workforce’s potential', as EPRs can bring 'business benefits' in terms of 'exposing any underlying bias in the way organisations value female employees' and generating staff trust and commitment. In contrast, a prominent area of activity has been occupational pensions (UK0411107F). However this has largely been in terms of closing 'defined-benefit' (DB) schemes, based on salary and service calculations, to new staff and offering plans based on 'defined contributions' instead. In manufacturing and production, for example, 61% of companies offer DB arrangements to existing employees, but only 35% to new staff. Only a handful of organisations have shifted to hybrid schemes.

A decollectivisation of pay?

The survey suggests that pay structures and arrangements for progression are normally flexible, with considerable scope for variation by individual employees. Traditional, narrow graded pay structures are used by 39% of manufacturing companies, 24% of private service firms and 34% of public service employers. However, 58% of manufacturing firms and 54% of private service firms use individual pay rates or ranges (35% in the public sector). Furthermore, flexible grade structures such as 'broadbanding', 'job families' or a mixture of both are employed in 59% of manufacturing firms and 70% of private service companies. The figure is lower in the public services (41%), where 58% continue to use pay spines (compared to around one in 20 private sector firms). In terms of pay progression within these structures, employers say they base their decisions on an appraisal of individual performance, skills and competencies (nearly two-thirds of private sector employers and nearly half in the public sector) with a link to market rates, inflation and ability to pay. The CIPD survey report notes that 'the influence of collective agreements on salary levels meanwhile appears to be diminishing'. The relevance of collective agreements in pay determination has steadily fallen through the four CIPD surveys, from 33% of respondents in 2002 to 23% in 2005.

Variable payments in the form of additional short-term bonus and incentive plans are widespread. These are used in 62% of manufacturing and production firms and in 69% of private sector service employers but, understandably, in only one-in-five public sector or voluntary organisations. Most are driven by business results. Where such schemes are offered, the proportion of staff in receipt has steadily increased since 2002, from 83% to 89% for technical and professional employees and from 81% to 88% for clerical and manual workers. The maximum benefits available under such schemes average at around 10% of base pay for non-managerial staff, half the level of senior management. In addition, 40% of private sector firms offer employees access to a long-term share plan.

Commentary

A strategic approach to pay and benefits is increasingly vital for organisations. A tight labour market combined with low inflation means employers have to be imaginative to be competitive in recruiting and retaining staff without significant increases in paybill costs. With the influence of unions and collective bargaining diminished over much of the private sector (UK0504109F), many firms have introduced individual or group-based performance pay schemes and more flexible grading structures linked to the development of skills. Yet employers face problems both in developing appropriate strategy and in its implementation if they fail to sufficiently involve their staff. The CIPD report argues that 'employee and front-line manager involvement is an essential prerequisite for effective strategy implementation. Yet employee involvement which is either directly as part of a design team or indirectly via a union or staff association, is limited (and) front-line managers are not usually involved.' If managers and workers are to be reassured that initiatives like appraisal-set pay are fair and worthwhile, they should be involved from the outset. The irony for employers is that the decline of trade unions robs them of the upwards 'voice' and downwards legitimacy that their involvement can bring to decision-making. Pension provision is a case in point, with the retreat from DB schemes likely to have a negative effect on staff motivation and retention. Yet when it comes to employee pay and benefits, consultation is essential. As the labour economist Derek Robinson once put it: 'It is the fish who decide what is bait, and not the fisherman. We need to ask the fish what they would prefer to nibble on.' (J Arrowsmith, IRRU)