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Setting and reviewing pay

Setting and reviewing pay is an important, though not always straightforward, task.

It's natural for employers to want to reward their workers for the hard work they put in to making a business a success. Pay can attract, motivate and retain good staff - all of which benefit employers.

However, businesses also need to control costs and remain profitable. Any pay rises need to be carefully planned and balanced against costs in other areas.

Your aim as an employer and business owner is to find the level of pay that gives value for money to the business and rewards workers fairly.

Pay systems

There are 2 pay systems to choose from and employers can operate mixture of both:

Basic

Pay is fixed at an hourly, weekly, monthly or annual rate. This is simple to operate but might not provide your workers with any incentives to be more productive.

Incentive

Part or all of the pay is related to profits. This can be based on individual performance, group performance of a combination of both.

Incentive-based systems can be short-term (such as monthly commission on sales) or long-term (such as profit sharing).

ACAS notes that short-term schemes based on personal performance are better at incentivising workers than long-term schemes. On the other hand, long-terms schemes can help generate commitment from workers in the ongoing success of the business by giving them a stake in its future success.

Whichever system you use, you need to be transparent about how pay is calculated.

Changing your pay scheme can take time and will cost money so it important to have clear objectives before you begin and a plan in place to execute it.

Reviewing pay

Here are some things to consider if you are thinking about changing how much you pay your staff.

Legal obligations

Wages

You will have to pay the national minimum wage or national living wage to most workers. The hourly rates are set to rise in April 2017.

  From 1 April 2017 Current rates
25 and over  £7.50 £7.20
21 and over £7.05  £6.95 
18 - 20 year old rate £5.60 £5.55 
16 - 17 year old rate £4.05  £4.00
Apprentice rate* £3.50  £3.40

Read more about the national minimum wage and national living wage here.

Gender pay gap reporting

Employers can't discriminate on the grounds of gender when setting pay.

From 6 April 2017, private and voluntary-sector employers with 250 or more employees will have to publish information about difference between men and women's pay and bonuses.

Benchmarking

Compare your rates against similar businesses and your competition to ensure that your wages are competitive. If your wages are too low when compared to the rest of your sector, it is unlikely that the most talented jobseekers will choose to work at your business.

Remember to take into account regional differences factors that affect pay such as:

  • regional differences
  • demand for the product or service
  • whether there is a shortage or surplus of workers with the right skills.

Timing

Most businesses review individual pay annually at the same time as a performance appraisal.

However, this system means that employers and employees only have a single opportunity each year to discuss pay.
Some companies, including Gap and Adobe Systems, have switched to more a frequent appraisal system which makes it easier to link pay increases to performance.

Beyond pay

Beyond salary, what other benefits, training, perks and flexibility can you offer your workers?

Instead of increasing salaries, you could consider offering a bonus instead. Bonuses are easily linked to performance and may incentivise staff more effectivity than a pay rise.

Bonuses also give employers greater flexibility as you don't have to offer them to all workers and you don't have to issue them each year.

Cash bonuses are treated as earnings so income tax and class 1 national insurance contributions have to be deducted through payroll.

Talk to us about setting and reviewing pay.