Pay structures
Pay structures provide a framework for valuing jobs and understanding how these jobs relate to one another both within the organisation and to the external labour market.
Pay structures may also need to allow for certain additional elements other than basic pay rates, for example location allowances. Find out more in our pay structures factsheet.
Pay levels
There are several approaches to setting pay levels or ranges for jobs. For example, job evaluation is important for setting pay rates in the public sector. By contrast, market pricing can be more influential in the private sector. Where market rates are used, employers need to decide where to pitch in-house rates (for example, at the median or the upper quartile). See more in our factsheet on job evaluation and market pricing.
Pay awards
When setting the overall pay review budget for annual pay increases – which often includes performance-based pay rises as well as general pay structure movement (often known as the annual pay award or cost of living uplift) – key factors include:
- ability to pay
- inflation
- the going rate of pay awards
- market rate changes
- stakeholder perspectives, such as those of customers, employees, or investors.
There are variations by sector. In the public sector the government’s pay policy is key, sometimes together with union pressure. However, union pressure is rarely an issue for many private sector companies. The CIPD’s 'Pay, performance and transparency' survey explores the various factors that influence pay increase decisions. Our quarterly Labour Market Outlook reports look at pay forecasts for the coming year.
Pay progression
Individual performance, competency and skills are common factors used to move individuals along salary bands or ranges. Often, employers use a hybrid approach that bases progression on more than one factor. For example, it might involve assessing individual employee achievements against the backdrop of the wider labour market. Find out more in our factsheet on pay progression.
Many organisations expect ‘satisfactory’ performers to progress to a target point in their pay range. Among private sector service employers, the target is often the mid-point in the range. In the public sector, it tends to be close to the top of the salary scale. In the voluntary, manufacturing and production sectors, employers tend to be more split on where the target is. Read more in our performance-related pay factsheet.
Variable pay: Cash bonuses and incentives
In the private sector, there is widespread use of bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonuses). Employers often have more than one bonus or incentive scheme with senior staff often treated differently.
Among those that link reward to performance, common individual performance-related variable schemes include individual bonuses and sales commission. Profit-sharing and gain-sharing are common group performance-related plans. See more in our factsheet on bonuses and incentives. The CIPD’s 'Pay, performance and transparency' survey shows the proportion of employers that link employee pay to performance, and how they do this. It also looks at the reasons given by organisations not to adopt this approach.
The advantage of using variable pay is that they can link earnings closely to desired performance. In theory, it should only pay out when there is reason to do so. Variable pay, such as overtime or pension contributions, does not generally feed through into other remuneration elements and so does not create additional on-costs.
However, the success of variable pay schemes depends on such factors as:
- how performance goals are set;
- the type of tasks being encouraged;
- how fairly employees view the process and outcomes to be; and
- the approaches used to allocate rewards.
See our report Incentives and recognition: an evidence review for more detail.
