Part I - How to Propose the Right Pay Rise for Your Employees
Ensuring competitive pay for your employees without breaking the bank is a balancing act for HR and business owners. Getting your pay review right will help you retain experienced, high-performing employees and safeguard your investment in them. And it will also be easier to recruit as your salaries will keep step with the market.
In this two-part series, I explain what you need to consider to effectively determine the right pay rise for your people including:
Article 1 - How to Propose the Right Pay Rise for Your Employees
Your competitors’ pay intentions
Business and HR strategy
Distributing of your budget
Pay review communications
How do I know all this? Because I used to research and recommend pay review budgets to big corporate organisations in my role as a compensation and benefits specialist. Now I’m sharing this knowledge with you.
Business Results and Projected Turnover
The first question to ask is whether you can afford to increase your employees’ pay or not. This will come down to your projected financial results for the current and following years.
Whenever your fiscal year runs from and to, start thinking about pay increases several months before budgets are set. This will allow you to have a good idea of your company’s performance and a fairly solid idea of your projected income for the next year.
Depending on how your business operates, you could look at guaranteed work and profit margins and any rolling contracts that have built-in increases. For example, if your contracts all increase by inflation each year you’ll be able to predict additional revenue with certainty.
Once you’re clear on the financial health of your business and whether you can afford to increase salaries, it’s time to investigate what others in your sector are planning.
What’s Your Competition Doing?
Understanding what your competitors are doing around pay is key because it ensures your salaries remain competitive for your industry and geography. Which is critical when it comes to recruiting and retaining your staff.
You can find out who’s likely to increase their salaries and by what percentage by seeking market data. There are a few ways to go about doing this:
Find free pay review data - There are plenty of free pay surveys available for different industries, often carried out by recruiters. While these aren’t as comprehensive as some of the larger surveys that are based on hundreds of thousands of data points, they can give you a good steer.
Invest in market data - depending on the size of your payroll, it might be worth paying for a pay review budget report. If you employee 100 people with a payroll of £2.8m, every 1% increase costs you an additional £28k. Put your finger in the air and decide to increase salaries by 3% when everyone else is increasing by 1% and you could have saved yourself £56k in basic pay alone. Making an investment in market data money well spent.
I’d recommend XpertHR as a fairly well-rounded data provider who don’t charge the earth. They publish annual pay review reports indicating the average pay review budget for the UK as a whole and by industry. Take a look at some examples here.
Understand the Competitiveness of Your Pay
Once you know that other employers in your sector and geography are planning on increasing their employees’ salaries by x%, you need to decide whether this percentage is applicable to your business.
A major consideration should be how competitive your employees’ salaries already are. Let’s take an example: if you pay your accountant £30,000 but the market pays £40,000 you pay him 75% of the market rate for the role. Or 25% less than competitors.
If this is replicated across your entire employee population, you probably need to consider investing in a bigger pay review budget than your competitors. This will help you close the salary gap, improve your recruitment prospects and stop your staff from leaving.
To understand how your salaries compare to the market, you will need more market data.
Buying Job Market Data
What’s the difference between pay budget data and job market data? Pay budget data tells you the percentage companies are planning on increasing their salaries by; job market data sets out how much your competitors pay for different roles.
By investing in this additional data set, you can establish an overall picture of your staff pay against the market. There’s a lot to using market data so take a look at this video if it’s something you’re interested in.
Setting Your Pay Review Budget
What does all this mean? Let’s break it down into several likely scenarios:
Employees paid below market + business performance has been and is predicted to be strong = invest more in your pay review budget than your competitors
Employees are paid above market + your business performance has been and is predicted to be strong = invest less in your pay review budget than than your competitors
Employees are paid below market + business performance has been and is predicted to be weak = no pay raises
Employees are paid above market + business performance has been and is predicted to be weak = freeze pay until it salaries with the market
These are four basic premises. But what if - and this is certain to happen - some of your employees’ salaries are high and some are low in comparison to the market data? What do you do then?
Read the second article in this series to find out.