CHAPTER 25

TOTAL REWARD AND

SETTING PAY
THE OBJECTIVES OF THIS CHAPTER ARE TO:

1 Explain the concept of ‘total reward’ and the reasons for its increasing
prominence
2 Set out the different elements that can make up a reward package
3 Evaluate the alternative methods of setting base pay rates
4 Explore major current developments in the management of salary
progression systems
5 Introduce the ways in which regulation affects the level of pay in
organisations
6 Explore the ways that reward management practice varies
internationally
 Chapter 25  Total reward and setting pay

Introducing reward management

It is helpful to think about reward management in terms of two key decisions:

1 How much should we pay each person in our organisation?
2 How should the payment package be made up?
These are among the most important decisions HR managers have to take because they
have such significant outcomes. On the one hand they are a major determinant of
organisational profitability vis-à-vis competitors and may help determine whether an
organisation thrives or even survives. On the other they also help determine the standard
of living that individual employees are able to enjoy, the choices they are able to make
about how they and their families live their lives, when they can retire and how many hours
a week they are obliged to work. Importantly they also play a large part in determining
whether employees are motivated at work and prepared to demonstrate discretionary
effort. When poor decisions about pay are made the result is demotivation, higher levels
of absence, reduced productivity and an increased chance that an adversarial, low-trust
employee relations climate will develop. Finally, of course, these decisions are crucial to
an organisation’s ability to recruit and retain effective staff in competitive labour markets.
Organisations are obliged to compete with one another for good staff as well as for
customers, and as Charles Cotton points out in a CIPD survey of reward practices, ‘respon-
dents report that employees can be just as discerning as their customers in what they want
from their employer’ (CIPD 2007: 33). In tight labour markets, where it is harder to recruit
and retain the best-qualified people, more pressure there is placed on employers to develop
reward packages that suit employees as much as they suit their own needs. By contrast,
where labour markets are loose and the skills that employers need to source are in plentiful
supply, competitive pressure tends to force wage levels down.
For these reasons, great care must be taken when answering the two core questions set
out above, and it makes sense to think about how they should be answered in strategic
terms. This leads us to asking and looking for answers to a range of further questions:

• What are we seeking to achieve in designing or in redesigning our payment systems?

• What are our competitors doing?
• How do we wish to position ourselves as an employer so as to compete effectively in
the labour market?
• What constraints do we face when designing our reward systems?
• How can we avoid demotivating employees when making decisions about how much
and in what way we pay them?
• To what extent should employees or their representatives be involved in helping to
determine who is paid how much and in what form?
According to Armstrong and Brown (2009: 34) there are four key components in a writ-
ten reward strategy. First of all there needs to be a statement of intentions setting out,
in general terms, what the reward strategy of the organisation is seeking to achieve and
which reward initiatives have been chosen in order to achieve these core objectives.
Second, these ideas are expanded through a more detailed ‘rationale’, which explains
the objectives in greater depth and shows how the various elements that form the

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organisation’s reward policy support the achievement of those objectives. In effect this
amounts to a statement of the business case that underpins the strategy. To that end the
rationale should include costings, a statement of the benefits that will accrue, and an
indication of the means that will be used to evaluate its success. The third element is an
explanation of the guiding principles or values that have been used in developing the
initiatives and will be used to adapt them in the future. Typically this will include state-
ments which deal with ethical issues or which reiterate a commitment to core principles
such as equality between men and women, fair dealing or rewarding exceptional indi-
vidual performance. The final component is an implementation plan, setting out exactly
what initiatives are being brought forward and when, who has responsibility for their
introduction and what their cost will be.

ACTIVITY 25.1
Consider the following list of jobs and job holders. In each case think about
how much you think each currently receives annually in basic pay (i.e. exclud-
ing benefits, overtime, bonuses, etc.) and about how much you think each
should be paid. Make a list of the key criteria you are using in making your
decisions.

Primary school head teacher

The Prime Minister
Private soldier
Chief Executive of Vodafone
Newly qualified junior doctor
Experienced firefighter
Lollipop lady/man
Andy Murray

Total reward

In addition to developing much more clearly articulated strategies in the field of payment,
another key contemporary development in this field is a switch in perspective towards
‘total reward’ thinking on the part of managers. This approach involves giving proper
consideration to forms of reward which do not constitute pay, including elements which
are neither transactional, tangible nor even financial in nature. Payment remains a signifi-
cant part of any ‘total reward package’ that an employer offers, but it also incorporates
intangible (or relational) rewards which employees value and which they gain from coming
to work. These include opportunities to develop both career-wise and more generally as
a human being, the social life which is associated with working in communal settings,
recognition from managers and colleagues for a job well done and for the effort expended,
and more generally from a sense of personal achievement. Increasingly the opportunity to
work flexibly so as to achieve a better ‘work–life balance’ is discussed in this context too.
The idea is effectively illustrated in graphical form by Armstrong and Brown (2009: 25) in
their model adapted from work by the Towers Perrin reward consultancy (see Figure 25.1).

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Transactional

Base pay Pensions

Contingent pay Holidays
Bonuses Healthcare
Incentives Other perks
Shares Flexibility
Profit sharing

Individual

Communal

Learning and development Leadership

Training Organisational values
Career development Voice
Recognition
Achievement
Job design
Work-life balance
Figure 25.1 Relational
Total reward

Here four distinct categories of rewards are identified, the implication being that each has
equal potential significance as a source of reward from the employee perspective.
The change in perspective away from a narrow focus on payment towards a broader
focus on ‘total reward’ has come about largely because of developments in the commercial
environment. Year on year, organisations operating in the private sector are facing greater
competitive pressure in their product markets leading them to search for ways of reducing
their costs while retaining or improving the levels of quality they achieve. In the public
sector competitive forces increasingly play a role too, but here pressure to keep costs down
comes primarily from government ministers who have a responsibility to taxpayers seeking
good value for their money. The trouble is that these pressures are being faced simultane-
ously with tighter labour market conditions, making it difficult for employers to recruit,
retain and motivate the staff they need without substantially increasing pay levels. There
are a variety of responses to this conundrum that organisations are embracing. One
involves employing fewer, but more highly paid, people to carry out existing work more
efficiently. Another involves keeping a lid on payment levels while simultaneously looking
for other ways of rewarding staff effectively. It is this latter approach which has led manag-
ers to think about the ‘total reward’ package that they offer.
As a rule, managing the tangible components (i.e. the financial ones) is relatively
unproblematic provided basic principles are adhered to and the correct technical decisions
are made. While they enable organisations to secure a degree of competitive advantage in
their labour markets, these tangible parts of a total reward package are readily imitated
by competitors. It is much harder, in practice, to replicate intangible rewards. Over the
longer term it is thus in the interests of organisations to improve the perceived value of
the intangible elements, but that is a great deal harder both to achieve and to evaluate.
Moreover, several important intangible rewards are ‘intrinsically’ rather than ‘extrinsi-
cally’ motivating, and by definition cannot be directly provided by managers. These are
terms used by psychologists to distinguish between sources of positive motivation which
are external to individuals and given to them by their employer, such as money or praise,

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and those which are internally generated. An example of intrinsic motivation is someone
putting a great deal of effort into a project at work simply because they find it interesting
or enjoyable. The result may be very considerable satisfaction on the part of the employee
concerned, but this has not resulted directly from any management action. All managers
can do is try to create and sustain a culture in which individual employees can achieve
intrinsic motivation and hence experience work which is rewarding.

ACTIVITY 25.2
How far do you agree with the proposition that managers should think in
terms of ‘total reward’ as a means of recruiting, retaining and motivating their
staff? Are praise and career development as important as pay? Would you
trade some of your pay for greater recognition and development
opportunities?

WINDOW ON PRACTICE
Total reward at the Crown Prosecution Service
In 2006 the Crown Prosecution Service (CPS) launched a new reward system which was
heavily influenced by the ‘total reward’ concept. Until 1996 when responsibility for reward
management was devolved, the CPS’s 8,500 staff were paid on standard terms and condi-
tions which were negotiated nationally for civil servants working across all government
departments. After devolution incremental changes were introduced that aimed to meet
the particular needs of the CPS, culminating in this major overhaul. Labelled ‘Invest’, the
new approach aims to underpin the CPS’s evolving agenda.
The first priority for the CPS is to manage successfully a major programme of
expansion. New responsibilities taken over from the police require that the CPS employs
300 new lawyers and 500 new administrators. ‘Invest’ is designed to increase the attrac-
tiveness of a career within the CPS and to help retain staff more effectively. An explicit
objective of the CPS is to make itself ‘an employer of choice’ for lawyers and people seek-
ing a career in public administration. A second aim is substantially to improve perfor-
mance. The CPS has as its central corporate objective a mission to become recognised as
‘a world-class prosecution authority’. This requires cultural change and the acquisition by
staff of a range of new skills and attributes.
The new strategy aims to meet these objectives in a number of ways. First, a job
evaluation system has been introduced to ensure that each job is fairly graded according
to the skills its holders require and the responsibilities they shoulder. Second, a new per-
formance appraisal system has come into effect to strengthen links between pay and indi-
vidual effort and contribution. The existing Civil Service benefits package has been
enhanced with new elements such as childcare services and a counselling service, the
whole package being promoted with greater coherence at the recruitment stage. A major
element is enhanced training and development opportunities for staff, allowing easier
career progression within the CPS. Employees are sponsored to attain professional qualifi-
cations, and e-learning packages have also been developed to support career develop-
ment. Finally, flexible working initiatives have been developed, including a great deal
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more home-working, which aim to meet the needs of both the CPS and its employees.
In the future it is intended to introduce long-service awards and to recognise individual
achievements with formal letters of recognition from senior managers.

Source: Suff (2006).

The elements of payment

The payment of any individual employee will be made up of one or more elements from
those shown in Table 25.1. Fixed elements are those that make up the regular weekly or
monthly payment to the individual, and which do not vary other than in exceptional
circumstances. Variable elements can be varied by either the employee or the employer.

Basic rate
The irreducible minimum rate of pay is the basic. In some cases, this is the standard rate
also, not having any additions made to it. In other cases, it is a basis on which earnings
are built by the addition of one or more of the other elements in payment.

Plussage
Sometimes the basic has an addition to recognise an aspect of working conditions or
employee capability. Payments for educational qualifications and for supervisory respon-
sibilities are quite common.

Table 25.1 The potential elements of payment

Bonus Profit allocation Variable elements

Discretionary sum • Irregular
Incentive Group calculation basis • Variable amount
Individual calculation basis • Usually discretionary
Overtime payment
Premia Occasional
Contractual
Benefits Fringe benefits Fixed elements
Payments in kind Other • Regular
Accommodation • Rarely variable
Car • Usually contractual
Benefit schemes Other
Pension
Sick pay
Plussage ‘Fudge’ payments
Special additions
Basic rate of payment Basic

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Benefits
Extras to the working conditions that have a cash value are categorised as benefits and
can be of great variety. The most common are company cars, subsidised meals, childcare
vouchers, private health insurance, staff discounts and occupational pensions.

Premia
Where employees work at inconvenient times – or on shifts or permanently at night – they
receive a premium payment as compensation for the inconvenience. Sometimes this is built
into the basic rate or is a regular feature of the contract of employment so that the pay-
ment is unvarying. In other situations, shift working is occasional and short-lived, making
the premium a variable element of payment.

Overtime
It is customary for employees working more hours than are normal for the working week
to be paid for those hours at an enhanced rate, usually between 10% and 50% more than
the normal rate according to how many hours are involved. Overtime is earned by 18%
of workers in the UK (Kensington 2015), a further 20% apparently working additional
hours without being paid (TUC 2015). Where overtime is paid it can account for a signifi-
cant portion of an individual’s gross pay.

Incentive
Incentives are elements of payment linked to the working performance of an individual
or working group, usually as a result of prior arrangement. This includes payment by
results schemes that reward people for the quantity of their output (e.g. sales commission)
as well as other forms of performance-based payment. Incentives are paid to 59% of
employees in the UK private sector, compared with only 21% in the public sector (van
Wanrooy et al. 2013: 96).

Bonus
A different type of variable payment is the gratuitous payment by the employer that is not
directly earned by the employee: a bonus. The essential difference between this and an
incentive is that the employee has no entitlement to the payment as a result of a contract
of employment and cannot be assured of receiving it in return for a specific performance.
The most common example of this is the Christmas bonus.

ACTIVITY 25.3
If you could design your own ‘remuneration package’ which could be made up
from any of the items in Table 25.1, what proportion of each item would you
choose and why? Does your answer suggest ideas for further development of
salary policies?

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Setting base pay

One of the most important decisions in the development of reward strategies concerns
the mechanism or mechanisms that will be used to determine the basic rate of pay for
different jobs in the organisation. There is always a limit on how much any employer can
afford to pay if it is to remain competitive in its industry, but on the other hand there is a
limit below which it becomes impossible to attract or retain people with the required skills
and experience. Hence, as Gerhart (2009: 225) points out, product and labour market
pressures effectively set a ceiling and a floor to overall pay levels for any one job or
individual.
There are four principal mechanisms for the determination of base pay. They are not
entirely incompatible, although one tends to be used as the main approach in most
organisations.

External market comparisons

In making external market comparisons the focus is on the need to recruit and retain staff,
a rate being set which is broadly equivalent to ‘the going rate’ for the job in question. The
focus is thus on external relativities. Research suggests that this is always a major contrib-
uting factor when organisations set pay rates, but that it increases in significance higher
up the income scale. Some employers consciously pay over the market rate in order to
secure the services of the most talented employees. Others ‘follow the market’, by paying
below the going rate while using other mechanisms such as flexibility, job security or
longer-term incentives to ensure effective recruitment and retention. In either case the
decision is based on an assessment of what rate needs to be paid to compete for staff in
different types of labour market. Going rates are more significant for some than for others.
Accountants and craftworkers, for instance, tend to identify with an external employee
grouping. Their assessment of pay levels is thus greatly influenced by the going rate in the
trade or the district. A similar situation exists with jobs that are clearly understood and
where skills are readily transferable, particularly if the employee is to work with a stan-
dard piece of equipment. Driving heavy goods vehicles is an obvious example, as the
vehicles are common from one employer to another, the roads are the same, and only the
loads vary. Other examples are secretaries and computer operators. Jobs that are less
sensitive to the labour market are those that are organisationally specific, such as much
semi-skilled work in manufacturing, general clerical work and nearly all middle manage-
ment positions.
There are several possible sources of intelligence about market rates for different job
types at any one time. A great deal of information can be found in published journals such
as the pay bulletins issued by Incomes Data Services (IDS) and Industrial Relations Ser-
vices (IRS), focusing on the hard-to-recruit groups such as computer staff. More detailed
information can be gained by joining one of the major salary survey projects operated by
firms of consultants or by paying for access to their datasets. Information on specific types
of job, including international packages for expatriate workers, is collected by specialised
consultants and can be obtained on payment of the appropriate fee. In addition, there are
more informal approaches such as looking at pay rates included in recruitment advertise-
ments in newspapers, at job centres and online. There are also now a plethora of salary

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comparison websites which operate by collecting data about pay rates from people who
visit them to establish how well their pay compares with others in their professions
(Nagpal 2013:129). These can be useful for employers too. In addition, new staff, notably
HR people, often bring with them a knowledge of pay rates for types of job in competitor
organisations and can be a useful source of information. Finally, it is possible to join or
set up salary clubs. These consist of groups of employers, often based in the same locality,
who agree to share salary information for mutual benefit.

Internal labour market mechanisms

Just as there is a labour market of which the company is a part, so there is a labour
market within the organisation which also needs to be managed so as to ensure effective
performance. According to Doeringer and Piore (1970), there are two kinds of internal
labour market: the enterprise and the craft. The enterprise market is so called because
the individual enterprise defines the boundaries of the market itself. Such will be the
market encompassing manual workers engaged in production processes, for whom the
predominant pattern of employment is one in which jobs are formally or informally
ranked, with the jobs accorded the highest pay or prestige usually being filled by promo-
tion from within and those at the bottom of the hierarchy usually being filled only from
outside the enterprise. It is, therefore, those at the bottom that are most sensitive to the
external labour market. Doeringer and Piore point out that there is a close parallel with
managerial jobs, the main ports of entry being from management trainees or supervisors,
and the number of appointments from outside gradually reducing as jobs become more
senior. This modus operandi is one of the main causes of the problems that redundant
executives face.
Some analysts have stressed the importance of this kind of internal labour market in
determining pay rates. Here the focus is on internal differentials rather than external rela-
tivities. An interesting metaphor used is that of the sports tournament in which an organ-
isation’s pay structure is likened to the prize distribution in a knock-out competition such
as is found, for example, at the Wimbledon Tennis Championships. Here the prize money
is highest for the winner, somewhat lower for the runner-up, lower again for the semi-final
losers and so on down the rounds. The aim, from the point of view of the tournament
organisers, is to attract the best players to compete in the first round, then subsequently
to give players in later rounds an incentive to play at their peak. According to Lazear (1995:
26–33), the level of base pay for each level in an organisation’s hierarchy should be set
according to similar principles. The level of pay for any particular job is thus set at a level
which maximises performance lower down the hierarchy among employees competing for
promotion. The actual performance of the individual receiving the pay is less
important.
The second type of internal labour market identified by Doeringer and Piore is the craft
market, where barriers to entry are relatively high, typically involving the attainment of
a formal qualification. However, once workers are established in the market, seniority and
hierarchy become unimportant as jobs and duties are shared among the individuals con-
cerned. Such arrangements are usually determined by custom and practice, but are diffi-
cult to break down because of the vested interests of those who have successfully completed
their period of apprenticeship. Certain pay rates are expected by those who have achieved
the required qualification and it is accepted by everyone that this is a fair basis for reward-
ing people.

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Job evaluation
Job evaluation involves the establishment of a system which is used to measure the size
and significance of all jobs in an organisation. It results in each job being scored with a
number of points, establishing in effect a hierarchy of all the jobs in the organisation
ranging from those which require the most knowledge and experience and which carry a
great deal of responsibility to those which require least knowledge and experience and
require the job holder to carry relatively low levels of responsibility. Each job is then
assimilated to an appropriate grade and payment distributed accordingly. The focus is
thus on the relative worth of jobs within an organisation and on comparisons between
these rather than on external relativities and comparisons with rates being paid by other
employers. Fairness and objectivity are the core principles, an organisation’s wage budget
being divided among employees on the basis of an assessment of the nature and size of
the job each is employed to carry out.
Usage of job evaluation has increased in recent years. It is currently used in determin-
ing the remuneration of at least some employees by around 45% of organisations in the
UK (CIPD 2017: 11). It is a well-established technique, having been developed in all its
most common forms by the 1920s. In recent years organisations have found it useful as
part of moves towards single-status contractual arrangements (where everyone is
employed on the same basic terms and conditions) and resolving pay issues following
organisational mergers. Much of the recent growth has been in the public sector, local
authorities and the NHS being examples of major employers establishing new schemes,
but the surveys suggest that job evaluation is very widely used in the private sector as
well. Moreover, few organisations abandon it, once introduced. The maxim that ‘job
evaluation is the one management tool that refuses to go out of fashion’ thus continues
to hold true.
Despite its popularity it is often misunderstood, so the following points have to be
made:

• Job evaluation is concerned with the job and not the performance of the individual job
holder. Individual merit is not assessed.
• The technique is systematic rather than scientific. It depends on the judgement of
people with experience, requiring them to decide in a planned and systematic way, but
it does not produce results that are infallible.
• Job evaluation does not eliminate collective bargaining where trade unions are recog-
nised. It determines the differential gaps between incomes; it does not determine pay
levels or annual pay rises.
• Only a structure of pay rates is produced. Other elements of earnings, such as premia
and incentives, are not determined by the method.
There are many methods of job evaluation in use and they are summarised by Armstrong
and Murlis (2007: 129–64). Where a non-analytical or ‘whole job’ scheme is used a panel
of assessors examines each job as a whole, in terms of its difficulty or value to the busi-
ness, to determine which should be ranked more highly than others. No attempt is made
to break down each job into its constituent parts. By contrast, an analytical scheme
requires each element or factor of the job to be assessed. The most widely used analytical
schemes are based on points-rating systems, under which each job is examined in terms
of factors such as skill, effort and responsibility. Each factor is given a weighting indicating
its value relative to the others and for each factor there are varying degrees. A score is then

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given depending on how demanding the job is in terms of each factor, with the overall
points value determining the relative worth of each job – hence its grade in the organisa-
tion’s pay structure.
In recent years there has been great growth in the use of highly sophisticated computer-
assisted job evaluation systems marketed by leading firms of consultants which award
scores to each job on the basis of information gathered from job analysis
questionnaires.
The points values eventually derived for each job can be plotted on a graph or simply
listed from the highest to the lowest to indicate the ranking. Then – and only then – are
points ratings matched with cash amounts, as decisions are made on which points ranges
equate with various pay grades. This process is illustrated in Figure 25.2, each cross rep-
resenting a job. The most common approach involves using a graph on which one axis
represents the current salary for each job evaluated and the other the number of job evalu-
ation points awarded. A line of best fit is then drawn and each job assigned to a grade.
Salary-modelling software is widely available to help with this process.
It is virtually inevitable that some jobs will be found to be paid incorrectly after job
evaluation has been completed. If the evaluation says that the pay rate should be higher,
then the rate duly rises – either immediately or step by step – to the new level. The only
problem is finding the money, and introducing job evaluation always costs money. More
difficult is the situation where evaluation shows the employee to be overpaid. It is not
feasible to reduce the pay of the job holder without breaching the contract of employ-
ment. There have been two approaches. The first is buying out. The overpaid employee is
offered a large lump sum in consideration of the fact of henceforth being paid at the new,
lower rate. The second device used is that of the personal rate or ‘red circling’, so called

A job that
is red circled
Current salary

Grade 4

Grade 3

Grade 2

Grade 1

Figure 25.2
Categories of
reward. Job evaluation scores

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because the job is circled in red on the job evaluation chart. The outcome is that current
job holders continue to be paid at the present level, but their successors are paid at the
lower job-evaluated rate.

Collective bargaining
The fourth approach involves determining pay rates through collective negotiations with
trade unions or other employee representatives. Forty years ago, this was the dominant
method used for determining pay in the UK, negotiations commonly occurring at industry
level. The going rates for each job group were thus set nationally and were adhered to by
all companies operating in the sector concerned. Recent decades have seen a steady erosion
of these arrangements, collective bargaining being decentralised to company or establish-
ment level, where it survives at all. The rise of service sector organisations with lower
union membership levels has ensured that collective bargaining arrangements now cover
only a minority of UK workers. According to van Wanrooy et al. (2013: 83) only 13% now
have any of their terms and conditions determined via collective bargaining of any kind.
The experience of many other countries is similar, but there are regions such as Eastern
Europe and Scandinavia where collective bargaining remains a major determinant of pay
rates. Where separate clusters of employees within the same organisation are placed in
different bargaining groups and represented by different unions, internal relativities
become an issue for resolution during bargaining.
In carrying out negotiations the staff and management sides make reference to exter-
nal labour market rates, established internal pay determination mechanisms and the size
of jobs. However, a host of other factors come into the equation too as each side deploys
its best arguments. Union representatives, for example, make reference to employee need
when house prices are rising and affordable accommodation is hard to find. Both sides
refer to the balance sheet, employers arguing that profit margins are too tight to afford
substantial rises, while union counterparts seek to gain a share of any increased profits
for employees. However good the case made, what ultimately makes collective bargain-
ing different from the other approaches is the presence of industrial muscle. Strong
unions which have the support of the majority of employees, as is the case in many
public-sector organisations, are able to ensure that their case is heard and taken into
account. They can thus sometimes ‘secure’ a better pay deal for their members than
market rates would allow.

ACTIVITY 25.4
Which of the four mechanisms outlined above do you think is usually most
efficient for setting the following?

• Base pay
• Annual cost of living increases
• Executive remuneration packages
• Bonus schemes

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The importance of equity

Whatever methods are used to determine pay levels and to decide what elements make up
the individual pay package, employers must ensure that they are perceived by employees
to operate equitably. It has long been established that perceived inequity in payment mat-
ters can be highly damaging to an organisation. Classic studies undertaken by Adams
(1963) found that a key determinant of satisfaction at work is the extent to which employ-
ees judge pay levels and pay increases to be distributed fairly. These led to the development
by Adams and others of equity theory, which holds that we are very concerned that
rewards or ‘outputs’ equate to our ‘inputs’ (defined as skill, effort, experience, qualifica-
tions, etc.) and that these are fair when compared with the rewards being given to others.
Where we believe that we are not being fairly rewarded we show signs of ‘dissonance’ or
dissatisfaction which leads to absence, voluntary turnover, on-job shirking and low-trust
employee relations. It is therefore important that an employer not only treats employees
equitably in payment matters, but is seen to do so too.
While it is difficult to gain general agreement about who should be paid what level of
salary in an organisation, it is possible to employ certain clear principles when making
decisions in the pay field. Those that are most important are the following:

• a standard approach for the determination of pay (basic rates and incentives) across the
organisation;
• as little subjective or arbitrary decision making as is feasible;
• maximum communication and employee involvement in establishing pay determination
mechanisms;
• clarity in pay determination matters so that everyone knows what the rules are and how
they will be applied.
These are the foundations of procedural fairness or ‘fair dealing’. In establishing pay rates,
it is not always possible to distribute rewards fairly to everyone’s satisfaction, but it should
always be possible to do so using procedures which operate equitably.

WINDOW ON PRACTICE
Countries vary considerably in terms of how much different groups are paid, some being a
good deal more equal than others in terms of how organisations pay people at different
levels and how far income is subsequently redistributed via taxation and state benefits.
International statistics on inequality are published each year by the United Nations
in its Human Development Reports and by the World Bank. The level of equality in a soci-
ety is measured using the Gini coefficient. Reported as having a Gini coefficient of 100 it
would mean that all the wealth was in the hands of a single individual (i.e. as unequal as it
is possible to be). By contrast, a Gini coefficient of 0 would indicate a society in which all
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wealth was distributed wholly equally between everyone. The reported figures for 2017
show that the most unequal country in the world (or at least the most unequal country
that reports its figures) was South Africa, with a Gini coefficient of 63.4. Other African
countries also report very high levels of inequality as do most countries in South America.
Among the western industrialised countries, the most unequal is the USA (Gini coefficient
of 0.39), the UK following behind with a figure of 0.35. By contrast some European coun-
tries are a great deal more equal. The Gini coefficient in Slovenia was just 0.24, Denmark,
Japan and Finland also come close to the top of the equality table.
Although wealth varies across international borders for many reasons, the level of
pay plays a major part. The same patterns are reflected in the figures on pay equity in
industrialised countries published regularly by the OECD and the United Nations in their
Human Development Reports (2015). One measure that is used is the Palma Ratio which
takes the richest 10% of the population’s share of gross national income and divides it by
the poorest 40% of the population’s share.
According to the most recent OECD statistics, dating from 2015–2018, the ratio in
South Africa is 7, demonstrating spectacular levels of inequality between the top 10% and
the poorest 40%. In the USA the figure is currently 1.8 and in the UK 1.4 In Eastern and
Northern Europe the Palma ratios are lower, indicating more equal societies.
While the precise figures for each country fluctuate from year to year, the overall
pattern across most of the world during the past thirty years has been towards greater
inequality as measured by both these indices.

Sources: OECD Employment Databases, www.oecd.org/employment/emp/onlineoecdem-

ploymentdatabase.htm; United Nations, Human Development Report (2018).

Regulatory restrictions

Governments take action to restrict the extent to which inequality in pay levels occurs.
The nature of regulatory restrictions varies from country to country, some governments
taking a stronger approach than others. Excessive pay at the top is rarely restricted directly
by regulation because it is much easier to tackle the issue through high levels of taxation,
but measures are sometimes put in place which have the effect of limiting pay awards to
senior people. In the UK, public companies are now obliged to gain the approval of share-
holders before they alter any executive remuneration policies and, in any event, must
secure their approval for top salary payments every three years. Elsewhere it has been
common for governments who are concerned about wage inflation to introduce incomes
policies which limit pay increases to a set percentage in a particular financial year. In the
UK, as is common in most industrialised countries, there are three major ways in which
regulations restrict employer action more directly.

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Minimum wages

A National Minimum Wage has been set in the UK for over twenty years. This now applies only
to people under the age of twenty-five, most of whom qualify for an hourly pay rate of £7.70 (in
2019). Lower rates can be paid to trainees, apprentices and more generally to those who are under
21, but these too are regulated. For older employees a National Living Wage applies. This was
set at £8.21 an hour in 2019, the aim being to increase it to at least £9 an hour in 2020.

Equal pay law

A core principle of employment law is that men and women who work for the same employer
should be paid the same amount for doing similar work or work which, while different in
nature, is of equal value or should be graded at the same level. When an employee suspects
that this is not the case, he or she (most cases are brought by women) can challenge the
practice by bringing an employment tribunal claim. Provided there is evidence of a disparity
that cannot be explained by some other factor such as a difference in hours worked, quali-
fication levels or individual performance, the tribunal can require pay levels to be raised and
back payments to be made. From 2017 employers with more than 250 have been are being
required to publish data each year about how much their male and female staff are paid as
a means of discouraging them from continuing with unequal pay practices.

Unlawful deductions

The third restriction that applies in the UK concerns regulation on when an employer can
and cannot lawfully make deductions from a pay packet without first securing the agree-
ment of employees concerned. Some deductions, such as tax and national insurance, are
not only permitted, but are legally required. Others are permitted in law such as recovering
overpayments made earlier. Finally, there are situations in which employers are sometimes
tempted to make deductions but cannot generally do so lawfully. Importantly this includes
any kind of deduction made in response to actual or perceived misconduct and means that
it is unlawful to use employee fines as a disciplinary sanction or to suspend someone on
reduced pay pending a disciplinary investigation.

International diversity in reward management

Despite globalisation and the rise of multinational corporations, there remain distinct
national variations in the way that pay is determined. In a number of industrialised coun-
tries there remains resistance to the primacy of market comparisons. Instead, pay scales
and/or pay arrangements are agreed/determined at industry level, to a considerable extent
removing pay as a factor in labour market competition. To this fundamental divide

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between national approaches can be added different attitudes towards incentive payments,
employee attributes that should be rewarded and huge differences in taxation and social
security regulation. The extent of the diversity is best illustrated with some examples.

The US/UK approaches

These approaches are characterised by a high degree of decentralisation. Aside from set-
ting a minimum wage and requiring that men and women are treated equally, the state by
and large refrains from interfering in pay determination matters. Even in the public sector,
while overall budgets are set by government ministers and while they deal with major
public policy questions (like public-sector pension arrangements), ministers leave the
detailed negotiation of pay packages to local managers or to pay review bodies which are
independent of government. In the private sector, trade unions now play only a limited
role, management effectively deciding who should be paid what and in what way. Pay is
thus set according to what an organisation can afford and what the market requires. Indi-
vidual pay negotiation is now the standard approach. Performance-related pay (PRP) is
very common in the private sector and is becoming a great deal more common in the
public sector too, while the overall value of occupational pensions has been significantly
eroded in order to reduce company exposure to financial risk. Meanwhile executive pay
has rocketed upwards, way ahead of the increases seen in other countries.

The German approach

In Germany there is a good deal more centralisation, but pay is largely determined at the
industry level, not at governmental level. The majority of workers in Germany have their basic
pay set through legally sanctioned, industry-level collective bargaining arrangements. The
agreements set out the grading structure for each industry and, in many cases, also determine
the job evaluation factors to be used in assigning jobs to grades. Employers are not permitted
to undercut agreed minima (they are seen as being basic contractual rights), although they
can supplement them with locally agreed discretionary emoluments. Typical discretionary
payments vary from 5% in the financial sector to 25% in engineering industries. In larger
firms, only the most senior managers are employed on individual contracts – equivalent to
2% of the total workforce. Stock option schemes, however, are a good deal less common in
Germany than the UK due to unfavourable tax treatment. Incentive payments are common
in Germany. There are many piecework and individual performance-based schemes, as well
as government-sponsored profit-sharing arrangements. An attractive feature of German
remuneration is the wide existence of ‘thirteenth-month’ bonus payments in December.

The Japanese approach

The Japanese system resembles that of Germany in that it comprises industry-level pay
scales agreed between firms. It differs, however, in that it is person based rather than job
based. Collective bargaining also plays a lesser role as Japanese unions are all enterprise
based. Three separate factors determine each individual’s pay:
1 the career category
2 age/seniority
3 rank and class.

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There are five accepted career categories into which employees are allocated. Each has its
own pay scales. The five are as follows:

• general administration
• scientific/engineer
• secretarial/office
• technician/blue collar
• contingent.
Within each category, base pay is determined with reference to age (around 60% of pay)
and skill/effort (typically 40%). In a country with traditions of ‘lifetime’ or long-term
employment in one enterprise, seniority is central to reward. Earnings go up with each
year of service until the age of 50, after which they decline steadily. The skill-based ele-
ment operates in a similar way to traditional UK public-sector grade/incremental systems.
In Japan, however, progression is discretionary. Seniority plays a part in the skill-based
payments too, as there is usually a minimum time to serve in each class before promotion
can be gained. Bonus payments are mostly group based and typically equal two months’
pay. The result is a high degree of pay compression and an adherence to the maxim that
‘a nail standing too high will be pounded down’.

The Scandinavian approach

In Norway, Sweden and Finland payment arrangements tend to be very much more cen-
tralised than elsewhere, the government playing a decisive role that extends across most
industries. Collective agreements that cover salaries, benefits and all other conditions of
work are negotiated at national level between trade unions and employers’ associations
under the auspices of government agencies. These are typically long-term deals that, once
agreed, last three years or more. Government agencies arbitrate when agreement cannot
be reached. One result is a high degree of similarity in grading schemes across industries.
Another is a relatively low level of social inequality. Top executives in Scandinavian coun-
tries are typically paid eleven or twelve times the average wage, whereas in the UK and,
especially in the USA, the differential is now typically over fifty times. PRP is very common
in Scandinavian countries, but it tends to be team based rather than individual.

SUMMARY PROPOSITIONS

25.1. Until relatively recently many employers in the UK were greatly restricted in their
capacity to design reward strategies which met their priorities by the prevailing
system of multi-employer or industry-level collective bargaining. The experimenta-
tion that followed the disintegration of this system has led to both successful and
unsuccessful outcomes.
25.2. Simultaneous competition in product and labour markets has led employers increas-
ingly to think in terms of ‘total reward’ when developing reward strategies. This
involves incorporating all management initiatives which may have the effect of add-
ing value to the experience of working in an organisation.
➤
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➤ 25.3. The main elements of payment are basic rate, plussage, benefits, premia, over-
time, incentives and bonus.
25.4. There are four main alternative methods of setting base pay rates: external labour
market comparisons, internal labour market mechanisms, job evaluation and
collective bargaining.
25.5. Procedural equity is essential to the design of successful payment systems as is
adherence to government regulation in this field.
25.6. The approach taken to payment and the design of remuneration systems varies
very considerably from country to country.

GENERAL DISCUSSION TOPICS

1. Can payment ever be truly fair?

2. Do you think it is possible to identify ‘best practice’ in payment policy? What ele-
ments would you consider should make up any such package?
3. ‘Job evaluation does not produce equitable payment: it merely produces a ram-
shackle method of justifying the status quo.’ Do you agree with this statement?
4. Why have we seen increased interest in the concept of ‘total reward’ in recent years?
Why might interest grow still further in the future?

Theory into practice

The following article by Lucy Kellaway those paid more than you. All those paid
(2001) is light-hearted and witty, but it also less. You’d look up the salaries of your
raises several interesting questions about most comparable colleagues. You’d look
relative pay levels and how we should for those of the cocky ones whom you’ve
determine them. never rated.

Pandora’s pay packet Assuming that you had started the day feel-
ing reasonably content with your salary, by
Imagine if you got into work to find you
the end it would be a different story. Either
had been sent an email listing the salaries
you’d be seething at the higher salaries
and bonuses of everybody in your com-
paid to people you think less deserving
pany.
than yourself, or you’d be feeling sheepish
You’d fall on it, read it greedily. And then about those talented hardworking people
read it again. You’d scan the list for all earning considerably less than you.

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This is what happens in a case study in the While it may be dangerous to discuss sala-
latest Harvard Business Review. A disaf- ries at a dinner party, where bankers may
fected employee unearths a complete sal- be cheek by jowl with teachers, to discuss
ary and bonus list and promptly emails them in the office canteen is dynamite.
it to the entire staff. Sure enough, all hell
If salaries in your company were deter-
breaks loose.
mined fairly, according to some commonly
The four labour market experts wheeled on agreed principle, secrecy might not be
by the magazine to discuss the case agree necessary. But they aren’t determined like
on one thing. The forced disclosure will do that, are they? In the real world, your sal-
some good – it will bring about a more open ary reflects a thousand different things,
culture and a fairer pay system. your ‘worth’ being only one of them.

I think this is optimistic. Openness is not a When did you join the company? Was the
good thing per se. It is good only when the job market tight at the time? Which depart-
occasion calls for it. ment are you in? How well does your boss
like you? How good are you at complain-
Pay is the last taboo. Pay is full of iniquities ing? All these things affect your pay.
and will always be so. Better, therefore, not
to draw attention to it. In the public sector people traditionally
knew what others were paid, because for
If you meet someone at a dinner party, you each grade and each task there was a rate.
can ask them about their religion. You can But now, thanks to performance-related
ask them which way they are going to vote. pay, salary discussion is becoming taboo
You can ask what they paid for their house. there too.
(In fact, I consider this to be the height of
bad manners but people ask, nevertheless.) Some trendy new companies have experi-
mented with full salary disclosure. This
You may even, if circumstances are right, tends to work when the company is very
be able to ask about their sex lives. What young but as it grows and the outside
you cannot do, under any circumstances, labour market bears down, transparency
is ask how much they are paid. seems like less of a good thing.
You could say that this reticence is mis- It could be argued that by publishing all
placed and that in time pay will go the way salaries in a company you shock the system
of all the other taboos. into greater ‘fairness’. But even if this did
The reason salaries are so sensitive is that happen, it is doubtful whether it would be
they are the only ‘objective’ way we have desirable. Would you want to own shares in
of comparing your labour to mine. Your a company that could not hire good people
salary is a clear measure of what someone from the outside at higher wages for fear of
else is prepared to pay for you. alienating existing employees?

This makes pay more revealing than other We have, under our noses, a good example
kinds of financial information. of what happens when individual salaries
are forcibly outed. For the past few years,
If I know you paid a lot for your house I can directors of public companies have had to
conclude any number of things. That your disclose in full, gory detail how much they
salary is huge. Or that your wife’s is. That are paid. The aim of this was to rein in the
one or other of you inherited some money. worst of the fat cat pay increases.
Or that you made a couple of lucky prop-
Yet it is debatable whether it has in fact
erty moves in the past. There are all kinds
achieved that. Pay levels of top directors
of possibilities.
have continued to soar and the supposed
But your salary measures only one thing: it performance criteria they have held up
sums up your worth. Only as we all know, it to justify their bonuses have proved to be
does nothing of the kind. laughably easy to meet. Maybe they would

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have risen still further if disclosure had not So I am not going to tell you what I earn,
been required; maybe they would not. either. More than anything else, I do not want
to share this information with my colleagues.
What transparency at the top has certainly
done is to make everyone else’s sense of Yet suppose when I get into work tomorrow
outrage and envy all the greater. Now that I find that email waiting for me. Will I heed
the fat cat is out of the bag, we can all see the above and simply press the ‘delete’ but-
how fat it really is – and the sight does us ton? Like hell. I’ll fall on it, read it greedily,
no good at all. then read it again.

Source: Kellaway, L. (2001) Pandora’s Pay Packet. FT.com, 14 May © The Financial Times Lim-
ited 2019. All rights reserved.

Questions
1 Is pay really ‘the last taboo’ as is argued in this article?

2 Why is it only ‘dangerous’ to discuss salaries at a dinner party, but ‘dynamite’ to discuss them
in the office canteen?

3 Is the author right to argue that more openness in the area of pay is not something to be
welcomed?

FURTHER READING
The Chartered Institute of Personnel and Development carries out a big annual survey of reward
management policy and practice which is published in February each year. It can be downloaded
from the Institute’s website. In addition, the CIPD publishes the results of other research projects
that focus on reward.
Reward management continues to be an area of HRM practice which is heavily researched. Good
summaries of the most important recent contributions are the following:

Guthrie, J. (2007) ‘Remuneration: Pay effects at work’, in P. Boxall et al. (eds), The Oxford Hand-
book of Human Resource Management. Oxford: Oxford University Press.

Gerhart, B. and Weller, I. (2019) ‘Compensation’, in A. Wilkinson et al. (eds), The Sage Handbook
of Human Resource Management (2nd edn.). London: Sage.

Kessler, I. (2013) ‘Remuneration systems’, in S. Bach and M. Edwards (eds), Managing Human
Resources (5th edn.). Chichester: Wiley.

White, G. and Druker, J. (eds) (2009) Reward Management: A Critical Text (2nd edn.). London:
Routledge.

REFERENCES
Adams, J.S. (1963) ‘Towards an understanding of inequity’, Journal of Abnormal and Social
Psychology, Vol. 67, pp. 422–36.

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Armstrong, M. and Brown, D. (2009) Strategic Reward: Implementing more Effective Reward Man-
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Armstrong, M. and Murlis, H. (2007) Reward Management: A Handbook of Remuneration Strat-
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CIPD (2007) Reward Management: Annual survey report 2007. London: CIPD.
CIPD (2017) Reward Management: Annual survey report 2016–17. London: CIPD.
Doeringer, P.B. and Piore, M.J. (1970) Internal Labour Markets and Manpower Analysis. Washing-
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Gerhart, B. (2009) ‘Compensation’, in A. Wilkinson et al. (eds), The Sage Handbook of Human
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Kellaway, L. (2001) Pandora’s Pay Packet. FT.com, May.
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Lazear, E.P. (1995) Personnel Economics. Boston, MA: Massachusetts Institute of Technology.
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