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Annual Salary Review
Why Do a Salary Review?
Each year most organisations at a set time review their salaries and remuneration package for their staff. Most companies raise the staff wages by the consumer price index or inflation rate in order for salaries to remain at least at the current rate of inflation. This paper reviews not only the annual salary review, but where a company decides to place themselves in the market for their salary range and the effect that this has on recruitment and retention.
Many companies have always been known as a low to mid range employer in regards to salary. In ‘the five generic competitive strategies’ this would be deemed to be an overall low-cost provider (Thompson etal, 2010, pp. 140-149), trying to attract and retain a large portion of the skilled market place within a defined narrow, low salary range. The reason for this position includes:
- Other staff benefits such as access to discounts for a range of company products and services
- Non financial benefits such as free parking, modern working environment
- Local company with the decisions made locally
- Work-life balancewith limited after hour and overtime obligations and the ability to get the job done in the normal 7.5 hour day
- Not for profit organisation rather than a for profit organisation
This has meant that these companies attract good staff, but not always the highest achievers due to the lower salary and the culture of the business. Consideration to a move to the best-cost provider strategy paying staff the best rate in order to attract high calibre staff and to retain them is suggested.
Why Pay Market Rates
Paying at least the market rate and not below can help organisations to answer the following questions:
- Are we attracting and retaining the right people?
- How do we reward staff who show the right behaviours through the remuneration cycle?
- How does remuneration fit into the Corporate Strategy?
- How do these concepts combined with SHRM deliver on being an employer of choice?
Through a literature review we can understand in greater detail the best practise thinking around this concept.
Literature Best Practise
The literature on salaries, job satisfaction and remuneration review highlights that the pay is just one element of the total reason why a person joins and stays in an organisation. In fact salary and wages is below elements such as being connected to the cause or purpose of the organisation and for the role not being a job, but a vocation (Economou, 2011, p.56). Salaries and financial perks are not enough to keep any individual engaged outside of short term effects, whereas engagement and career development has a more long term effect (Economou, 2011, p.56). However, salaries need to be at a certain level in order for it to no longer be the primary concern for the individual to drive attachment (Ongori, 2007, p.50) and to bring individual satisfaction that is correlated with their own earnings (Clark et al, 2009, p.430 & p.445). This next section highlights the issues in salaries and remuneration reviews that lead to job satisfaction and therefore increased motivation, productivity and longevity in the role.
An agency relationship exists whenever one party (the principal) hires another person (the agent) who possesses specialised knowledge and skills to perform work on their behalf (WHO, 2000, p.7). The principal trusts that the individual will perform work well and be productive and that this will be optimal at all times (John & Weitz, 1989, p.11). The issue for organisations is that the principal usually has a different risk profile and objectives than the agent (John & Weitz, 1989, p.11), therefore the organisation needs to develop a strategic human resources strategy (SHRM) in regards to salary compensation, review and ongoing maintenance in order to avoid agency theory cost implications.
Strategic HR Management
Management theory informs organisations that the development of a SHRM plan is essential around remuneration. For Human Resources Managers the development of a plan and a policy will have a direct impact employee satisfaction, engagement and staff turnover (Clark et al, 2009, p.430). Importantly, at the annual remuneration review if the organisation is profitable the pay policy will have a direct effect on the employees perception on profits and it has a direct correlation to staff turnover after the event (Clark et al, 2009, p.430).
The World Health Organisation (WHO, 2000, p.4) defines monetary and non monetary remuneration benefits as being:
- Other direct financial benefits:
- oIllness/health/accident/life insurance
- oClothing/accommodation allowance
- oTravel allowance
- oChild care allowance
- Indirect financial benefits:
- oSubsidized meals/clothing/accommodation
- oSubsidized transport
- oChild care subsidy/crèche provision
- Annual leave
- Flexible working hours
- Access to/support for training & education
- Study leave
- Planned career breaks
- OH&S counselling
- Recreational facilities
While these monetary and non-monetary benefits are available in a number of organisations the key is whether this is ‘strategic pay’ (WHO, 2000, p.13) in order to drive the right recruitment and retention strategies. Strategic pay drives the SHRM goals of an organisation and might include concepts such as:
- Merit pay– linked to the annual review, which might be higher than the standard eg above CPI due to activity conducted in the past year
- Competence pay– the individual has increased relevant education in the past 12 months or has developed skills in order to become more effective and this now deserves a higher review rate in order to retain the individual
- Team-based pay – for achieving team goals and the One Team concept of collaboration and cross functional activity
SHRM also informs an organisation on how staff salary is aligned to the outcomes of the firm. Organisations exist to make a profit, so how does the remuneration strategy reflect this outcome? Theorists suggest that this can be achieved through a combination of salary and incentive to help align the remuneration theory to the outcomes of the firm (John & Weitz, 1989, p.11). SHRM would recommend that this is reviewed from time to time to ensure that it still aligns to the core values and objectives of the organisation.
Finally, it is recommended that organisations review their pay systems on an ongoing basis and at least annually (BIS, 2011).
Recruitment & Retention
According to Lemieux et al the setting of suitable remuneration levels assists organisations in enhancing the quality of ‘worker-firm matches’ (2009, p.46). By setting the wage and conditions at a level that is higher than market will enable a firm to attract quality candidates, however a salary lower than market rate will attract less quality and potentially less skilled employees to the business. This relates to the best-cost provider verses the low-cost provider generic strategy question. If this policy is pursued over time then a systemic issue occurs where the employer is viewed in the market place as a low pay and conditions employer and then can find it difficult to recruit quality staff to the business (Lemieux et al, 2009, p.46).
Salary and conditions also have an effect on employee turnover. Ongori (2007) has conducted research into why people leave organisations. His primary finding is that people leave due to economic reasons with their job role; however this is usually reduced in large organisations which can provide more reasons for attachment and higher wages (p.50). This is the reverse for organisation related turnover – pay and pay-related variables have little effect (p.50). This is especially true in organisations that have strong communication and good management practices.
What is concerning is that Ongori found that regardless of the organisation’s communication and management practises is that a high performer will leave the organisation if they are insufficiently reward (p.51). Turnover can also be attributable when other firms pay more for similar roles (p.51). To stop this turnover he recommends compensating employees through (p.53):
- Pay for performancethrough remuneration review increases
- Employee incentive programs
- Individual bonuses, lump sum bonuses
- Sharing of profits through remuneration review increases
- Increasing other benefits
Lemieux et al (2009) have conducted some recent research into the use of the wage review to introduce productivity gains. The best way to get an outcome for productivity gains is to develop a performance pay system that rewards staff for greater productivity rather than a system that pays for productivity upfront (p.6). With a performance based system there is never any guarantee that there will be any performance gains form the existing workforce, however this system will be attractive to some potential employees and will help to attract those with the right behaviours to the organisation (p.6), therefore, over time, naturally lifting the productivity levels.
Another finding is that productivity gains from a performance system does not normally change the characteristics of a role, and therefore the core culture of the business but it does change the productive characteristics of the employees (p.45). This is what leads to the productivity gains of the organisation while retaining the core SHRM intent.
Our workforce is aging and at the same time Generation Y is entering our workplaces. Organisations need to start planning now about how to attract and retain this key future employee segment.
The number one reason that Gen Y join an organisation is for training opportunities (McCrindle, 2007, p.4). Salary is listed 6th in importance. In order the reasons why Gen Y joins an organisation are for:
- Management style
- Work flexibility
- Staff activities
- Non-financial rewards
There are also differences in how Gen Y are retained within a business. The key information is that Gen Y will not stay long term, only 1:4 would consider staying with a company for more than 5 years (McCrindle, 2006, p.17). So other strategies are needed including:
- Promotion – Gen Y want progress throughout the organisation within 2 years (p.17)
- Empowerment (p.17)
- Work/Life balance through collaborative learning, flexibility in work hours (p.18)
- Workplace Culture – gender and cultural diversity (p.18), merging of work and social lives (p.20)
- Varied Job Role – opportunity for advancement, lots of change and access to new technology (p.20)
- Management Style – public reward & recognition, manage in an inclusive, participative manner (p.20)
- Training – lifelong learning, new technologies, making them more relevant to their role with an eye to the future. This is a key – 89.6% will stay with an organisation if they receive regular training (p.21)
Salary is also important as this enables the Gen Y to have the lifestyle that they want and to have work/life balance, but this is secondary to the areas identified above.
Considerations for Managers
With many organisations remuneration cycle about to commence, considering the following areas for improvement in staff attraction, retention, motivation and productivity would assist the planning:
1. Creation of a SHRM policy for the organisation that incorporate the key strategic decisions of attraction, retention and motivation of staff. Once develop to define which of the five generic strategies does the firm want to be – low-cost provider or best-cost provider and how does this fit into the overall Group strategy.
2. Conduct a salary review process for each department within the group to ensure that salaries and rewards are linked with the SHRM position and the strategic intent of the Group. This should include a comparison of salaries in the marketplace today, staff feedback via MySay and exit interview data combined with a salary system such as Mercer.
3. Use the feedback in this paper for the coming review based upon the inflation rate. Clearly the research says that giving staff a blanket small rise does not deliver additional productivity, motivation or longevity in the role. Whereas rewarding staff based upon performance and sharing the profits does make a difference. The rate will need to be determined as a part of the SHRM strategic review.
4. Develop a performance pay system to introduce the concept of productivity gains, understanding that it may not influence the current employees, but will assist the business in recruiting the right staff for the future
Kessler developed a model to assist HR practitioners with salary planning and review. As discussed earlier this should be an annual role of the HR team aligned with the SHRM and strategic intent. The model works by viewing both the external market rate and value of the role with the internal value as determined by the annual CDP and the analytical and non-analytical elements of the position. When both are factored together the organisation can determine the correct salary and worth of the role to the firm.
There will always be a natural tension between internal and external equity and to a certain extent this is determined by the individual who will need to be displaying the right behaviours and delivering the right results to earn a pay review.
While this may not be egalitarian, organisations are in the business of making a profit and this system of remuneration reward will help to attract and retain quality staff.
BIS , 2011, ‘Set The Right Pay Rates’, viewed 10 August, www.businesslink.gov.uk
Clark, AE, Kristensen, N & Westergard-Nielsen, N, 2009, ‘Job Satisfaction and Co-Worker Wages: Status or Signal?’ The Economic Journal , No. 119, March, pp. 430-447
Economou, A, 2011, ‘Engage Staff to Make it More than Just a Job’, The Advertiser , 8 August
John, G & Weitz, B, 1989, ‘Salesforce Compensation: An Empirical Investigation of Factors Related to Use of Salary Verses Incentive Compensation’, Journal of Marketing Research , Vol. 26, No. 1, February, pp. 1-14
Kessler, I, 2005, ‘Remuneration Systems’, in Bach, S., Managing Human Resources: Personnel Management in Transition , pp. 318
Lemieux, T, MacLeod, WB & Parent, D, 2009, ‘Performance Pay and Wage Equality’, The Quarterly Journal of Economics , Vol. CXXIV, Issue 1, February, pp.1-49
McCrindle, M, 2006, ‘New Generations at Work: Attracting, Recruiting, Retraining & Training Generation Y’, McCrindle Research , pp. 1-25
McCrindle, M, 2007, ‘Understanding Generation Y’, The Australian Leadership Foundation , pp. 1-6
Ongori, H, 2007, ‘A Review of the Literature on Employee Turnover’, African Journal of Business Management , June, pp. 49-54
Thompson Jr, AA, Strickland III, AJ & Gamble, JE, Crafting and Executing Strategy: The Quest for Competitive Advantage , 17th Edition, McGraw-Hill Irwin, New York
WHO, 2000, ‘Healthforce Incentive & Remuneration Strategies: A Research Review’, Issues in Health Delivery Services , Geneva, pp. 1-37