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Salaries: Bringing It All Together - Performance, Market And Job

Aug 17, 2007
An effective salary system covers three major areas which we have written about in previous articles. These are internal relativities, the market and developing the structure.

Maintaining the system in a logical and transparent way is crucial as people expect to have their salaries reviewed at least annually and want this to be on a consistent and fair basis. An effective salary review process also enables the business to reap the benefits of having a comprehensive salary system.

The key elements that need to be brought together at this review are:
* Market movements
* Company performance
* Individual performance
* Current individual salary

There are still organizations which ignore these factors. They feel everyone should have the same pay increase. They do not communicate company performance to their people so expectations are not tempered by this. Many still feel they should just pay the CPI (Consumer Price Index) increase.

Market movements
These movements can be obtained from surveys. As we have already analysed each of our jobs against the market and built our structure we only need the overall market movement for the past year.

The exception to this may be a particular specialist job family, industry or location that has changed more significantly.

Once this movement has been identified for the year the ranges we established when building the system should be increased by this percentage - if the organization can afford it (see next paragraph). Please note, at this stage we are not increasing any individuals' salaries.

Company performance
Increases passed on must be able to be sustained so company performance needs to be considered. There should be no surprises to staff here as consistent communication about business performance is a necessary part of effective communications.

Individual performance
This should be evaluated through the performance management system together with any other objective process for determining the performance levels of individual employees during the period since the last pay review.

This should be done prior to the salary review process. The pay review is not the main reason for a performance review but a by-product of it.

Current individual salary
Each individual's current salary should be looked at relative to the mid point of the range that has been calculated for each grade or band of jobs using the market data. If you consider the salary range for a job in thirds then we might expect developing people to be in the lower third, fully competent people in the middle third and higher performers in the upper third.

The overall plan, when allocating increases should be to accelerate people to towards the relevant third based on their current performance. They don't have to jump there immediately but moving at a rate greater or lesser than the percentage increase applied to the ranges will do this. If they receive the same increase as that applied to the range they would maintain their position in the range.

If there are to be more "above average" people than "below average", and this is usual, the overall budget for salary increases will be higher than the increase applied to the ranges. This is discretionary and needs to be looked at along with company performance and what can be afforded.

A large factor in this will be the proportion of people lower down in the range who are performing well. They will need an increase that slowly takes them up the range.

All of these factors can be brought together at review time by the use of a matrix that incorporates performance, salary position and percentage increase for individuals.

Effective communication with people on the issue is important. Not only do they need to know what their salary has been changed to but the factors taken into account should be explained. It is often useful to include the value of any benefits paid or provided so individuals can see the total package they are earning.

The business benefits
Having a transparent and consistent system which can be understood by employees goes a long way to building trust and satisfaction as well as rewarding performance. It will also save the time spent by managers making individual decisions on pay. Costs can be budgeted and controlled and linked directly to what the company can afford to pay or wishes to pay.

Overall, the system takes care of one of the important and often emotional issues in business - what to pay people. Having this in place allows the business to then consider other aspects of attracting and retaining the right people.
About the Author
Paul Phillips is a Director of Horizon Management Group; a specialist human resource management consulting firm. He has over 30 years experience in HR and, while based in Australia, has worked in a number of overseas locations. www.horizonmg.com
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