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Is Pay Important? – Yes If You Get It Wrong

Jane owns a chain of retail stores and good management staff are hard to find. When recruiting she has to negotiate a salary which is attractive to the candidate but fits within her budget. As these decisions are made on a case by case basis she swears each new recruit to secrecy.

What’s wrong with this? Nothing if it works. However, any strategy that relies on employees not discussing salaries with each other and threats of discipline if they do, is not really viable in the long term. It also implies that something is not quite fair.

Here is a test. If a list of employees and their pay was accidentally left on the photo copier and someone put it on the notice board, would it just be embarrassing or a major problem?

Although people should be actively discouraged from talking about salaries, it is personal and confidential, individual salaries should have a rationale behind them which can be explained when necessary.

Let’s leave out award covered jobs for now, although they can be included if desired, and talk about those positions where there is a degree of discretion as to how much can be paid. An effective salary system needs to meet a few criteria.

Internal relativities
Jobs need to be defined and assessed according to their importance to the organization. This then establishes a “pecking order” which is acceptable and is normally done using some form of job evaluation. This is assessing the job only – not the person in the job.

External relativities
This stage then establishes what the market rates are for the jobs in your organization. This again is based on the jobs not the people.

Reward for performance
Now we look to the people in the jobs and ensure that the salary is related to their performance. This is important when they are first recruited, although more difficult as you may not have a clear idea on their performance. It becomes much more important with their regular reviews.

Ease of administration
Any system that incorporates the above needs to be maintained in a consistent way without becoming an administrative burden. This means it needs to be kept simple and well documented. It also means all employees need to understand it and managers need to be able to apply it.

Fair and equitable
Any salary system, to be accepted and effective needs to be fair and equitable. That is, although not everyone will be happy with their level of pay (we can always spend more than we earn) they should accept that is a fair reward for what they do. If this is not the case pay will always be an issue with them and it will be difficult to get to a stage where they are totally satisfied with their job or the organization.

There is a big incentive for organizations to get this right. Research, most notably that by Frederick Herzberg, tells us that pay is not usually a motivator but pay that is considered to be inadequate or unfair is certainly a demotivator. He labeled these types of factors “hygiene factors” – they had to be in place before people could be motivated. More recent studies into employee satisfaction tend to confirm these findings.

Time invested in establishing and managing a salary system provides significant benefits to a business as it frees up managers and their staff to focus on activities that deliver results.

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.