Managing reward systems
KEY POINTS
Pay and grading make up the biggest sources of grievance among employees according to a survey by IRS: 40% of organisations, including 12 NHS trusts, made this claim.1 The growth of individualised pay arrangements, such as IPRP, which typically lack transparency, has unquestionably fuelled discontent with how pay decisions are made. Employees often regard pay awards based on a manager's assessment of individual performance as arbitrary. A study of appraisal systems found that generally staff considered the review process unfair, with many believing performance grades were allocated before the meetings took place in order to tally with what could be afforded from the performance-related pay pot.2 A further IRS survey reinforced this view, with almost one-in-five private companies and more than a third of public sector organisations reporting that employees believed there was a "quota system" in operation.3
The previous chapter noted the dissatisfaction with IPRP felt by many civil servants, provoking an examination of the current arrangements in the four largest agencies by John Makinson, group finance director at media company Pearson, and fuelling a desire for change. The review body making pay recommendations on top public officials (Senior Salaries Review Body) highlighted the lack of transparency in IPRP arrangements, noting that: "There is no direct relationship between performance mark and award, a matter which clouds the transparency of the system".4 Makinson's report for the Government's Public Services Productivity Panel recognised that any performance pay system would have little chance of success unless the essentials of the reward structure - basic pay, cost-of-living increases and progression - were improved.5
These findings indicate that careful management of the reward process, from development to implementation, and from monitoring to reviewing and auditing, are all vital in achieving the aims of remuneration in supporting business objectives. There are several important steps employers should take to ensure reward systems generate and retain the broad support of the workforce. First and foremost, reward policies and processes should be properly and repeatedly shared and communicated so employees are clear what is expected of them. Involving employees in the planning process and ensuring adequate training is provided for those with responsibility for allocating rewards - such as line managers who conduct performance appraisals and make recommendations for pay rises based on their assessment - are both crucial if the system is going to be perceived as fair and equitable by staff. Feedback from managers and staff about the effectiveness of the remuneration package will uncover problems. Responding quickly to employee concerns about poorly functioning aspects of the pay system - like the problems over pay progression in the Civil Service (See Trends in reward management, for example - is essential to continued staff backing. Regular auditing of the reward system - something that too few organisations do - will help identify strengths, in terms of effectiveness, and weaknesses, and highlight what if any changes are required.
Organisations differ widely and so do pay systems. Determining which reward strategy to adopt or how to change an existing approach depends on what the employer aims to achieve and what message the organisation wants to send its employees (see figure 3.1). American pay guru Edward Lawler recommends that the following questions be answered when deciding changes to pay systems:
Why are we doing this?
How does it support business objectives?
What are the design mechanics? (For example, is merit pay right for the organisation?)
What is the reality of the operation?
How well will we implement changes?6
Underpinning the approach will be the existing organisational culture, although as the previous chapter highlighted, reward systems can be a powerful catalyst for change. One important influence on a company's reward strategy is its age: a relatively new business is unlikely to have proper pay structures and remuneration decisions tend to be made informally and are almost always linked to market rates; whereas a mature business will already have a formal grading structure and established methods, such as performance appraisal, of determining changes to pay rates and benefits.
New or altered reward systems generally reflect an organisation's strategic objectives - defined as a contingent approach to pay. In this way, the reward strategy is driven by business needs and what the organisation considers important, such as continuous improvement, customer service, flexibility, innovation, quality and teamwork. An article in People Management described it in the following way:
"Of all the Holy Grails that HR professionals seek, the one that aligns reward strategy with business strategy offers the greatest prize. But in many ways it is also the most elusive. By aligning reward and business strategies, elements of the paybill can be targeted at the employees who add most value. And it allows reward to exert leverage over employees' behaviour and performance by sending a clear message about what outputs or skills attract most financial recognition and pay progression. As long as the leverage is on aspects of employee performance that lead directly and unambiguously to improved business performance, everyone (except poor performers) is bound to win."7
The following examples illustrate how business objectives influence reward strategies:
Asda's decision to launch its Colleague Share Ownership Plan (CSOP) in 1995 was directly linked to the objective of improving staff retention.8 The company's 1997 annual report highlighted the thinking behind the scheme:
"The Colleague Share Ownership Plan is designed to extend share option participation throughout the business and the directors consider that the CSOP is an important factor in motivating and retaining a wider group of colleagues."
Based on the company's existing executive share option scheme, the CSOP affords eligible staff free shares in the business. Employees receive share options worth 25% of their salary, with half their options exercisable after three years and the remainder after six years.
The BBC embarked on a complete overhaul of its pay and grading systems in 1996, resulting in the introduction of a more flexible 11-band wage structure with salaries determined both by nationally negotiated agreements and individual performance assessments.9 Commercial pressures and the need to improve efficiency at a time when the licence fee was only keeping pace with inflation prompted the shift. In the more competitive environment and with finite resources, the BBC said it required the flexibility for pay to reflect both the external market and individual performance. The guiding principle of the BBC's remuneration philosophy is: "A modern, flexible and fair pay system which helps to attract, retain and reward the best talent with the most competitive pay and create a closer link between pay and performance."
Customer service is of paramount importance to Gala Clubs, the UK's leading bingo operator.10 The company's remuneration strategy aims to reward staff for their contribution to meeting business targets, including the delivery of improved customer service. Incentives linked to individual, corporate and team performance form a major part of the overall compensation package. One of the key objectives for incentives is improving admissions, something that depends largely on a club's ability to enhance the customer's experience.
Underpinned by its vision of being "the UK's most admired employer; an outstandingly successful company for which people are committed to work", Littlewoods Retail established a new pay and benefits package for its senior managers that was designed to deliver its business objectives by focusing on managers' individual contribution and offering greater flexibility and fairness in pay and benefit provision.11 In the words of the firm's group chief executive, the new reward package "will encourage employees to use personal development rather than status as the yardstick by which to measure success". As a result, recruitment and retention have improved and the old status-driven reward structure has been replaced by a market-based system which pays senior managers according to their skills and personal contribution to the business.
In January 2000, National Australia Group Europe (NAG Europe) implemented a new pay and grading structure covering employees in its UK subsidiaries, including the former Clydesdale, Northern and Yorkshire banks.12 The company's aim was to support its business objectives and new organisational structure by aligning HR practices and standardising pay and grading arrangements for the majority of its UK workforce. "Having the same terms and conditions across these different entities allows us to streamline processes and at the same time create something simpler to understand and communicate," explained remuneration manager Nigel Grimshaw.
Oracle UK's decision to introduce a flexible benefits scheme supported its business objectives by increasing the perceived value of the employment package which enabled the firm to meet its goal of improving recruitment and retention in the highly competitive IT labour market.13 Flex is regarded as a key factor in assisting the company to become "the employer of choice" by offering the workforce a more attractive reward package tailored to individual circumstances. "We wanted to find ways of differentiating ourselves from our competitors who are trying to recruit the same skill sets. That meant not trying to squeeze people into a set benefit provision but offering choice and meeting their individual needs," says compensation and benefits manager Chris Wilson.
The introduction of a broadbanded pay structure for managers at pharmaceuticals manufacturer Reckitt & Colman (now Reckitt Benckiser) was tied to business objectives such as creating a less risk-averse culture and saw the philosophy underpinning salary progression change in the following way: in the past, rises were based on promotion within the relevant country hierarchy, whereas under the new approach increases are retained within a salary band; competitiveness has superseded internal equity as the priority influence on pay decisions; "rate for the job" has been replaced by indicative market pricing; and the old emphasis on compensating individuals for cost-of-living increases has been jettisoned in favour of rewarding performance and contribution.14
The basic reward strategy will generally encompass a base salary structure, which, as the previous chapter discovered, is increasingly market driven. Increases in salaries are typically determined by across-the-board rises or individual rises based on an assessment of performance, or a mixture of the two. Where it is performance based, assessment is either against pre-determined objectives or a mix of output targets and accomplishment of specific competencies. Variable pay, which is pay that does not become a permanent part of base pay such as bonuses geared to individual, team or corporate performance, forms the second main element of the reward strategy. Benefits provision, sometimes referred to as indirect pay, is the third strand.
Developing a fair package that attracts, develops, motivates and retains staff, and which also helps attain business objectives, requires careful planning. There are potential pitfalls so difficult decisions will have to be made, however. For example, retaining internal relativities as well as external competitiveness may prove difficult, provoking a choice as to whether the latter should override the former. Striking the right balance between extrinsic (artificial incentives, such as recognition, money, skills development and career opportunities) and intrinsic rewards (those factors that are naturally occurring in the work itself) is also imperative. Above average pay and benefits may not sustain motivation and commitment if the job itself is unsatisfying and does not afford the opportunity to achieve personal goals and attain individual needs. Poor design simply breeds discontent - for instance, the IPRP systems covering many civil servants contain too few pay bands in a period of low inflation for staff to feel they are making pay progress up the range, so some individuals could take up to 20 years to reach the top of their salary band.
It was noted earlier that transparency in how salaries are determined as well as adequate and regular communication about the reward process are vital to success. A recent study by WorldatWork, formerly the American Compensation Association, which questioned 1,218 workers, found that many employers failed to do this.15 Only half of respondents were "somewhat satisfied" or "very satisfied" with the process used to establish and communicate reward, compared with seven in 10 who were happy with their overall salaries. The pay process concerns all the decisions that affect an individual's salary, including: how promotions are decided; how jobs are assigned to grades or bands; and how people progress through bands.
EVALUATING AND ANALYSING JOBS
The pay of individual employees tends to be based on three factors: the organisation's value of the job, the person's worth to the business and the value of the job/individual in the external market. Additional factors, such as affordability, cost-of-living rises, pay strategy (in terms of whether the company's rates target the upper quartile, median or lower of the market salaries), and, where applicable, trade union pressure, are also important.
Job evaluation or some other comparative exercise analysing the worth of jobs, such as competence-based job analysis, often helps to determine pay levels and ranges.
Job evaluation
Job evaluation - the process that determines the relative importance of jobs in an organisation, and which is commonly used as a basis for determining pay and grading structures - retains its popularity, despite declarations to the contrary, because it is a reliable method of comparing jobs (see figure 3.2 , above, for a summary of how the different types of job evaluation typically work). It is particularly appropriate in meeting the challenges posed by moves towards single-status and in harmonising arrangements and overcoming anomalies between merged businesses, as well as in addressing equal pay concerns. A 1998 IRS survey revealed that three-quarters of the employers polled use formal job evaluation for at least some jobs; the same proportion as in 1993.16
Although the development of less hierarchical and flatter organisations was at first thought to preclude the need for complex and formal job evaluation, this has not proved to be the case. Relatively new arrangements, such as broadbanding, are often facilitated by job evaluation techniques, mainly because they help to clarify jobs so that individuals less assured of vertical career progression can plan lateral career movement across different functions. Evidence of the widespread use of job evaluation to determine broad pay bands comes from the 1999 CIPD survey of broadbanding and job families. It found that analytical job evaluation - which separates, analyses and weights elements within jobs, including responsibility and mental and physical skills - was used by 42% of firms as the basis for assigning jobs to broad bands.17
A second misgiving about job evaluation in today's workplaces is the emphasis on establishing a hierarchy of internal jobs without reference to the external labour market. One way of overcoming this conundrum is to use internal relativities to fix base pay and award additional supplements to take account of market pressures. A final potential drawback of job evaluation is its rigidity, leading to a system that is quickly out of date. However, ideally job evaluation exercises should be carried out every three to five years, so changes over time to the work being performed can be analysed. Job evaluation has also been criticised for being too bureaucratic and complex. London councils, as part of the deal to establish single-status pay arrangements in local government, have attempted to make the process easier by developing a computerised system. Indeed, many firms use information technology to some degree, including online questionnaires for staff and the delivery of automated job profiles, to help them conduct job evaluation analyses.
Single status in local government, which provides a single pay spine with local determination of grading structures, has led to the development of a NJC (National Joint Council for Local Government Services) job evaluation scheme. Although councils are free to choose any job evaluation scheme, the NJC scheme is strongly recommended, and a survey by IRS in August 2000 found that of the 70 local authorities that had made a choice, 70% had opted for the national arrangement.18
West Sussex County Council (WSCC) was one of the first local authorities to use the NJC scheme. Aside from the need to move to harmonised terms and conditions under the single-status agreement, there were other compelling reasons influencing WSCC's decision to embark on an overhaul of its pay and grading structure through job evaluation. Following the settlement in 1994 of an equal pay for work of equal value case for school welfare assistants brought by the public service union Unison, which cost the council a substantial sum, it was determined to eliminate sex discrimination and create a grading structure that is, according to head of personnel Chris Lindsay, "defensible in equal value terms".19 There was also a need to deal with inconsistencies in the existing structure. "One problem with our existing arrangements was that, especially for those jobs that had been created before we used any kind of job evaluation, the grading often reflected the market in recruitment when the jobs were established," explains Lindsay. The revised pay and grading structure contains 12 pay bands and the process took more than two years to complete.
Elsewhere job evaluation is being widely applied. At BGT, the trading arm of Centrica, formerly part of British Gas, the implementation of a new market-related salary structure involved each of the 25 principal occupations at the company being formally assessed using the job-evaluation points system developed by Hay Management Consultants. Each job attracts a given points score, and has just one substantive salary point, known as a "spot salary".20 NAG Europe used Hay job evaluation score ranges to construct a new 10-grade structure to cover all employees in its UK subsidiaries.12 "From this it was possible to identify which grades at each of the banks were largely the same as in the other banks, which were similar, and which didn't correspond at all," explains remuneration manager Nigel Grimshaw. Although the aim of introducing a grading structure based on job families was to move away from a job-evaluated approach at Nationwide Building Society, the creation of the accompanying pay system was, nonetheless, also aided by the application of Hay job evaluation methods.21
Job/competence analysis
The value of a job evaluation exercise will depend largely on the quality of the jobs, roles and competence analysis on which the assessment and comparison is based. Job and competence analysis provides the details for job descriptions, what people are expected to do and the behavioural aspects that affect their performance. It involves identifying the facts about jobs, including basic information such as job title and reporting relationships as well as key tasks and main responsibilities. Information is generally gathered via interviews with jobholders and line managers, and through questionnaires or computer-assisted job analysis programmes. At West Sussex County Council, for example, the job evaluation process was started with the completion of detailed job description questionnaires through interviews with staff by a group of trained analysts.19
Competence analysis produces profiles and frameworks and the necessary information for a competency-based pay structure by helping to define roles. It involves an analysis of what individuals do at work (technical/functional competencies) and how they go about it (behavioural/emotional intelligence competencies). As with job analysis, a competence investigation relies on feedback on the what and how of jobs from jobholders and their managers. Most organisations use one-to-one interviews or focus groups - where a small meeting led by a facilitator discusses the issues and develops ideas based on a creative interaction of the participants. Three methods add rigour and consistency to the analytical process: behavioural event interviews, critical incidence technique and repertory grids. These tools all attempt to focus the interviewee's attention on important aspects of their work and the competencies underlying the ways they approach them.
Bank of Scotland, which introduced a competency-based pay system for its 3,000 "appointed" staff - team leaders, managers and specialists up to the equivalent of area director level - in January 1999, used focus groups, involving 200 staff, to draft its competencies.22 The system replaced the previous 10-grade job-evaluated pay and grading structure. In the focus groups, staff were asked to think about the personal characteristics required of people performing particular roles, and how these might change in the future.
Job roles/profiles
Pay expert Michael Armstrong says: "A role definition describes the part played by individuals in fulfilling their job requirements. It concentrates on purpose in the form of outputs (accountabilities) and expands on the information contained in a job description by setting out the competencies required to perform the role satisfactorily."23 Analysing roles can focus on the individual or several employees to produce a generic definition of a role. Job or competence analysis is used to define job roles and job profiles.
Among others, role definitions specify what people do, how they are expected to behave, what skills, knowledge and competencies they require, and what decision-making and problem-solving activities they are typically engaged in. Generic definitions identify the common characteristics of several similar roles.
Role profiles at South Staffordshire Water Group, which since April 1999 has used them as the basis of its performance and development system and new pay arrangements, list the "key accountabilities", authority, and financial and other limits of the job, and indicate which competencies are required at which levels.24 Bank of Scotland's role profiles are described as a combination of a role specification and person specification.22 These were prepared by line managers and validated by the central project team responsible for the overall design of the bank's competency-based pay arrangements to ensure consistency across the organisation. The Royal Bank of Scotland's "role competencies" - eight hierarchical competencies that identify different levels within the role of relationship manager - operate much like a job evaluation tool by offering a clear statement about the differences between levels.25 At Fine Tubes, the Plymouth-based engineering business, nine job roles replaced 128 different job descriptions when the company moved to a broadbanded, competency-based pay system for its 300-strong workforce in 1999.26 Each job profile consists of a brief and general "role description" and whichever behavioural indicators from whichever of the 28 competencies are relevant.
PAY STRUCTURES
Traditional pay structures, consisting of a sequence of job grades into which jobs are fitted, although still popular, are being challenged by newer approaches such as broadbanding and job families. The move towards broader salary bands and grouping broadly similar jobs into the same category is considered more appropriate for today's less hierarchical and more flexible organisations. Generally, different groups of employees will be covered by a separate pay structure, but broadbanded systems can cut across functions to cover the entire workforce, or at least a large proportion of it. Job family arrangements also have separate pay structures for related jobs, but are often accompanied by pay curves that provide greater flexibility to reward high-performing individuals or employees that are increasing their levels of competence.
Pay structures provide a framework for determining levels of pay and for managing relativities between groups and individual employees so that remuneration practices are perceived as equitable and fair. Pay structures may govern individual rates, which move in accordance with individual performance or through fixed incremental progression, for example. Typically, the pay band consists of a maximum rate that is between 20% and 50% above the minimum. Conventional graded pay structures have in the region of six to 15 grades, with differentials between pay ranges of around 20%. There is usually some overlap between the bands of around 50%.
Broadbanded pay structures differ from conventional graded systems in so far as they have a far greater pay range within a band and there is only a small number of bands. Band width can be 100% or more, and there are often only five bands. Pay levels are generally determined by market rates, with market relativities likely to exercise a greater influence on positioning roles in broad pay bands than internal relativities. At Blue Circle Cement, for instance, each of the six bands covering white-collar employees at the company, consisting of a minimum (80%), a midpoint (100%) and a maximum (120%), are expected to "change in response to market forces."27 By contrast, The Royal Bank of Scotland operates a single, broad pay band running from £15,000 to £100,000.25 Generally, pay progression through each salary band in a broadbanded structure is related to the acquisition of skills and knowledge, as well as performance.
The following examples provide an illustration of broadbanding in practice:
Anglesey Aluminium reorganised its grading arrangements for its 500-plus employees in April 2000 to recognise broader job roles. Initially all staff employees (around 100) moved to a broadbanded structure consisting of six grades, down from the previous eight.28 This is underpinned by the Hay evaluation system for the measurement of job size, with progression through scale points linked to performance. Manual grades will gradually move to a new four-banded structure as job roles and accountabilities change.
Bank of Scotland rationalised its previous 12-grade structure to a single broadbanded grade covering all 7,000 non-supervisory staff when it introduced a competency-based pay and grading framework in August 1996.29 Particular jobs where staff perform specific tasks defined by their job descriptions have been replaced by a broad job role covering a wide range of skills and responsibilities. Employees' base salary is linked to the number and level of technical competencies they possess - defined as "a way of describing the ability to be able to do a group of tasks which need similar knowledge and skills" and which include maintenance of customer accounts and financial administration. Pay progression is based on a combination of technical and personal competencies - which relate to how individuals go about their work, focusing, for example, on how well they get on with colleagues and how good they are at coping with change - as well as agreed work objectives. Supervisors and managers were moved to a broad banded competency-based structure in 1999, consisting of four bands of overlapping salary ranges.
BNFL's previous 33-point salary scale for white collar staff, with progression based on service-related increments, and four-grade structure covering manual workers, with pay movement from starting rate based on four automatic annual increments, was replaced with a five-band system covering all employees in April 2000.30 Pay progression is now based on the acquisition of skills and contribution to the company. A reduced number of broad job descriptions based on competencies was developed to reflect the generic nature of many jobs across the grades. Each job role has three main pay points: entry, fully competent and full contributor.
The Ministry of Defence transferred its 60,000 employees to a new pay and grading structure in February 2000.31 The new arrangements involved the existing multitude of civil service grades migrating into a smaller and simpler structure built around four broad groups, each containing seven pay bands. Every grade is allocated to one of a number of equity share groups of broadly equivalent pay bands.
In 1998, Yorkshire Water established a broadbanded reward structure featuring six pay bands for its 2,500 staff.32 Previously, employees were arranged in one of 14 discrete grades. Each of the six broad bands has a lower and upper pay indicator, which are reviewed annually and adjusted in accordance with "company requirements or market factors". The company says the maximum pay indicator represents the salary that an individual in the band could achieve if the size of their role and performance justifies it. However, it does not represent a target salary that everyone in the band will achieve.
The steps needed to develop and install a broadbanded pay structure can be found in figure 3.3.
Pros and cons of broadbandingIn was noted in Trends in reward management that the benefits associated with broadbanding include greater flexibility in managing pay and benefits; more emphasis on the individual rather then the job; encouragement of lateral development rather than upward career moves as the only way of significantly increasing salary; and support for acquiring additional skills and competence. Other possible advantages include a reduction in the number of job evaluation requests and the elimination of grade drift, which is common in conventional grading structures.
Management Review's previous examination of reward included two case studies where broadbanded arrangements had been established. A spokesperson for one of these companies, the HSBC subsidiary Forward Trust, reported the following advantages of broadbanding:
"The organisation has the most flexible arrangements possible. It can respond to anything. It has thrown off all the shackles. The only problem is how much can we afford? Also, promotion is less of a problem than it used to be, because people now say 'how much?', rather than 'what grade?' Therefore, they are becoming less-status conscious, which is good generally and makes benefits less problematic."27
However, the elimination of grades, and consequently the status they confer, may cause problems among employees who are highly conscious of their position in the internal hierarchy. And grade drift may simply be replaced by band drift if controls are similarly lax. Other potential problems can arise from the time needed to track market movements and the varying ability of some managers to operate their own reward systems. At the same time, broadbanding may not be appropriate for every organisation: the corporate culture has to be conducive to such an arrangement.
Other potential problem areas are the expenditure of time and the need for adequate support services. Managing a salary system that is, in effect, a set of individual pay rates is extremely difficult and may require software to operate and control successfully. A successful broadbanding system will require line managers to have access to market rate information and the time to absorb the data so they can make informed and acceptable reward decisions. This will require extensive training in remuneration matters and the ongoing support of HR and pay specialists, among others. If staff believe the salary decisions of line managers are arbitrary, without proper consideration of market rates or the predetermined guidelines established for making such awards, the whole process could be undermined. Forward Trust reported that broadbanding required "more work to support than the previous system", but that this is a hidden benefit rather than a disadvantage, because managers have become more aware of labour market sensitivities.27
Payroll costs may also accelerate under a broadbanded salary system. By establishing a maximum level for each pay band, the system raises the expectation among staff that they will move to the upper limit. As a result, the majority of staff within a pay band may, over time, receive salaries above the comparable market rate. Thus the benefits gained by curtailing grade drift may be outweighed by escalation of another kind. On the other hand, placing an artificial ceiling - the band maximum - on the level of award in an attempt to dampen employee expectations can also create problems. Indeed, staff may see no difference between pay grades and salary bands.
As with other emerging pay systems, broadbanding may give rise to discrimination problems, in terms of equal value, if pay differences cannot be objectively justified. Equality-proofing broadbanded arrangements can help to prevent costly discrimination cases.
A summary of the principal pros and cons of broadbanded salary structures is contained in figure 3.4.
Figure 3.4: The pros and cons of broadbanding
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Pros |
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Cons |
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greater flexibility in making and |
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reduces pay equity |
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administering pay decisions |
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supports lateral career development |
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time-consuming (tracking market rates) |
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can facilitate organisational change |
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may not fit organisational culture |
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can improve communication |
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awards may be seen as arbitrary |
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helps to integrate reward system with |
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can be complex and hard to understand |
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corporate goals |
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may eliminate grade drift |
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by offering a maximum level, the system |
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may increase salary costs |
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devolves compensation decisions to line |
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time and resources taken to train line |
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managers |
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managers to make compensation decisions |
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can make staff less status-conscious |
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status reduction (ie loss of job title) may |
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create problems |
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can reduce the number of job evaluation |
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loose system is hard to control |
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requests |
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helps to focus employee attention on the |
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the basis of any award may be less visible |
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external environment rather internal equity |
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can encourage employee development and |
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possible bias, in terms of equal value |
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hence multiskilling |
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legislation |
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band drift may occur |
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skills acquisition needs to be tightly controlled |
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or costs may escalate |
Job family structures fit jobs that are essentially similar, although tasks are carried out at different levels, into the same category. Jobs within families can be linked in various ways, including the nature of work performed, such as data processing and administrative tasks; type of occupation, such as accountant or technician; and function, such as HR or finance. For example, all HR staff might belong to a distinct personnel function job family, or generic job families could consist of professional staff, team leaders or clerical employees.
Each job family will have separate pay arrangements with grade structures divided into a number of levels reflecting the range of work within a group. Pay levels are generally based on market rates for the different roles within each family.
Job families and broadbanding are closely linked. The CIPD survey referred to earlier found that 42% of respondents had attached job families to broadbanded pay structures.17 Firms tend to align job families with broadbanding because doing so overcomes the lack of structure perceived by staff in many broadbanded arrangements. Pay experts Michael Armstrong and Duncan Brown have observed an interesting development with the expansion of both broadbanding and job families. They report: "It is interesting to note that as broadbanding has extended and the number of horizontal divides in pay structures has diminished, we are now seeing the spread of job families and structures which have more 'vertical' divisions."33
According to the CIPD survey findings, the four principal reasons for establishing job families are to map our career paths (28% of participants); to achieve greater flexibility (24%); to identify market groups (22%); and to provide for rewards to be based on personal contribution and progress (21%). The research also found that job families are commonly related to job size as determined by a job evaluation exercise (60%).
The popularity of job family structures has grown as the labour market for professional and knowledge workers has expanded because such arrangements allow organisations the flexibility to adjust remuneration in line with market pressures.
Job family structures differ from one organisation to another. The following examples illustrate some of the different approaches that employers have developed and why:
csma, one of the UK's largest privately owned home, leisure and motoring clubs with membership restricted mainly to civil servants, established a job family structure to cover its 320 staff following an employee attitude survey in 1999 that revealed people felt their role in the organisation was not being recognised.34 Part of the solution was the development of a more effective infrastructure, creating an environment in which the organisation could achieve its aims and objectives. This it achieved by redefining individuals' roles, grouping them into job families, and expressing them as "accountabilities" and "personal attributes". csma now has nine job families. Examples of the types of roles within each family are:
1 - cleaner, postroom staff;
2 - caretaker, clerical assistant;
3 - member service adviser (staff in telephone contact with members);
4 - marketing assistant, assistants to managers;
5 - member service supervisors, sales executives;
6 - junior managers, executive
secretaries, regional managers;
7 - product managers, marketing managers;
8 - deputies to senior managers; and
9 - senior managers.
Developing the job families involved grouping related roles together on the basis of skills and attributes that they held in common. The role of member services adviser - individuals who work in the company's call centre - was chosen as a benchmark. Marketing director Gail Fee explains why: "[We could] work down from that to roles with fewer skills and different attributes, and also work upwards to define roles requiring different skills and attributes."
NAG Europe introduced a system of job families to describe and organise roles as part of a new pay and grading structure aimed at harmonising terms and conditions across its UK subsidiaries.12 The job families are built around two key concepts:
the nature of work, which is usually though not always associated with the functional areas within which an individual works; and
the level of work, which is determined by judging where there are clear and distinct differences between the hierarchical level of responsibilities, skills, knowledge and behaviours required to carry them out.
NAG has created 32 job families which map onto the overall grading structure. Each family is assigned a position in a job family - a process that avoids the previous practice of evaluating each individual to determine their level within the organisation's grading structure. The company now has 10 grades, and these are closely aligned to the relevant market remuneration. Grades are under pinned by Hay job evaluation, and the nine main grades each cover a specific range of Hay points. Jobs are placed in each grade depending on their level in the appropriate job family. A performance-based pay matrix determines the size of individual pay award each year.
The aim of implementing job families at Nationwide Building Society was to create a more flexible reward system that would improve the scope for career progression and skill acquisition, as well as complement the company's move to a flatter organisational structure.21 The previous job evaluated grading system had been coming under considerable strain as a result of several factors: a growing number of requests for the re- evaluation of jobs; an inability to accommodate specific occupational and functional labour market pressures; and a failure to facilitate Nationwide's goal of creating more flexible working practices. According to Deborah Rees, one of two heads of the reward team charged with designing and implementing the system, a job family structure was chosen "because of its ability to address most of the problems that the organisation was experiencing". Within the organisation there are five hierarchical levels, each with its own collection of job families, of which there are 11 (see figure 3.5). Nationwide decided to base job families on the nature of work, rather than on function, because it was the best way to keep the number of families to a minimum. The job family structure provides the basis for the company's pay arrangements and was introduced in July 1999. The reward system consists of a "ladder" of salary ranges. Each position in the 11 job families is assigned a target salary (with the range 20% either side) on the basis of the job's location within the family and external labour market pressures. At the beginning of 2000 only three people out of 13,500 employees were paid outside the new salary ladders, compared with as many as 1,000 who were rewarded outside the old grading system.
Xerox UK established a new competence-related pay and career structure for all 4,500 of its staff in January 1999. The system features 20 job families, each corresponding to a pay curve which incorporates between six and nine career points.35 Each career point corresponds to a pay band centred on a "midpoint" aligned to the market median, with a pay band of 40% (20% either side of the midpoint). James Bray, compensation and benefits manager at Xerox, explains the thinking behind the company's decision to adopt job families and a pay curve: "People can develop happily over time, improving their pay without having to keep looking for the next promotion, and we can reduce internal attrition, which had become a major business issue." However, each pay band also "shows the routes in and out to other job families".
Figure 3.5: Five job family levels at Nationwide
|
Job family level |
Level title and nature of job |
Job families |
|
Level 1 |
Service and support |
|
|
|
This level contains those roles in which |
Customer services |
|
|
decision-making extends over a few days or |
Support services |
|
|
weeks and the work is fairly well patterned, |
Specialist services |
|
|
involving people working individually. |
General services |
|
Level 2 |
Advice and team leading |
|
|
|
For technical and professional staff where work |
Customer relationships |
|
|
cannot always be specified in advance. Decision- |
Leading people |
|
|
making tends to involve tasks with a time span of |
Specialist advice |
|
|
between three months to one year. |
|
|
Level 3 |
Senior management |
|
|
|
Decision-making tends to involve tasks with a |
Leading implementation |
|
|
time span of between one and two years. These |
Professional development |
|
|
managers are often responsible for other managers |
|
|
|
and may include senior specialists who refine |
|
|
|
professional practices. |
|
|
Level 4 |
Executive management |
|
|
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This level contains general managers whose work |
Strategy development |
|
|
involves designing and developing new systems, |
|
|
|
services and products with strategic direction and |
|
|
|
turning corporate services into action. The decision- |
|
|
|
making would tend to involve tasks with a time |
|
|
|
span of between two and five years. |
|
|
Level 5 |
Director |
|
|
|
Decision-making tends to involve tasks with a time span |
Strategic direction |
|
|
of between one and two years. |
|
|
Source: Pay and Benefits Bulletin 495, May 2000 | ||
Pros and cons of job families
Job family systems offer employers a flexible arrangement that sets out clear career and pay progression paths and provides a structure to support today's flatter, more flexible organisations. This is because each family has its own career path, clarifying what individuals need to do to progress from one level to the next. Further career opportunities are also identified as the competencies and skills required for similar or unrelated job families are also transparent. Hence job families facilitate lateral and diagonal career development. The prominence given by employers in the CIPD to career paths as the most important objective in introducing job families led it to conclude that: "Organisations which have introduced broad bands to replace hierarchical structures ... are now contemplating the introduction of job families as alternative means of demonstrating career and pay progression opportunities to their staff."17
Paul Bissell, also of Nationwide, highlighted career development and flexibility as important benefits of job families. He says: "Job families support the idea of flexibility and multiskilling. There is a wide range of jobs within any particular family and, as such, there is opportunity for employees to branch out and acquire other skills." Specifically, the mutual society experienced the following benefits as a result of introducing a job family structure:
the successful accommodation of almost all jobs into the new structure;
the ability to adjust employees' pay to account for labour market pressures; and
the facilitation of career development and pay progression by linking rewards to the system.
There are several drawbacks to job family arrangements. The award of market-based rewards can be divisive, for example. By emphasising market-related rates, the system also runs the risk of raising expectations among staff who will naturally compare what they receive with pay for similar-sounding jobs elsewhere, even though roles with the same title can differ widely from one organisation to another. Nationwide's Bissell says that during the implementation process for the job families structure the company received a fair amount of "negative feedback" concerning the concept of a "market rate", with people making external pay comparisons with jobs advertised in the press.
Awarding market-based rates can make job family arrangements potentially discriminatory. Also, tracking external market rates is a time-consuming process. The structure can be cumbersome to administer, especially where there is a large number of job families. Moving between job families, although good in theory, might be harder to do in practice and staff can become disillusioned if they feel there are too few opportunities outside their current family.
A summary of the principal pros and cons of job families is contained in figure 3.6.
Figure 3.6: The pros and cons of job families
|
|
Pros |
|
Cons |
|
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help identify (map) career paths |
|
can inhibit career flexibility between families |
|
|
greater flexibility in making and |
|
can be divisive |
|
|
administering pay decisions |
|
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|
|
can afford special treatment to groups of |
|
can reduce pay equity |
|
|
staff with high market value |
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supports lateral career development and |
|
time-consuming (tracking market rates) |
|
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multiskilling |
|
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can accommodate most jobs |
|
cumbersome to administer |
|
|
aids pay progression |
|
may raise expectations when linked with |
|
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|
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market comparisons |
|
|
can provide structure for a broadbanded |
|
possible bias, in terms of equal value |
|
|
pay system |
|
legislation |
|
|
supports concept of employability |
|
|
Figure 3.1: Message in the pay packet
There is a wide variety of pay systems from which to choose. Employers often link their choice to organisational goals, with some systems better suited to the pursuit of specific aims than others. Contingency theory - that is, rewards linked to and reinforcing specific organisational objectives, such as recruitment and retention, or rather nebulous goals, such as stimulating employee commitment and motivation - underpins the type of reward package selected in most organisations. Traditionally, pay has been linked to either time (employees are paid for working a stipulated number of hours) or some form of collective or individual performance.
All elements of the new reward agenda, encompassing among others broadbanded and job family pay structures, market-related adjustments, competency-based pay, team reward and profit sharing, have one aim in common: they are geared, more or less, towards changing employee behaviour and linking workers' performance more closely to the goals of the firm. Since the 1980s, linking pay to strategic objectives has been much more robust.
The choice of pay system and structure will send a powerful message to the workforce as to the sort of behaviour the company is trying to stimulate. Wide pay dispersion tends to foster competition, while narrow distribution fosters cooperation and teamwork. Each pay strategy affects behaviour in a different way: individual performance-related pay, which is linked to the achievement of personal objectives derived from organisational goals, ties behaviour to outcomes deemed strategically important; profit sharing arrangements focus employee effort on the short-term financial performance of the company or business unit; incentive schemes, such as gainsharing, seek to boost productivity or quality, for example; team rewards naturally encourage cooperative behaviour; and competency-based systems attempt to ensure employees act and behave in a certain way as they go about their work.
Fairness lies at the heart of reward. To be effective, the workforce must regard the system as fair and the performance goals attached to remuneration realistic. If there is a question mark over the fairness of the allocation of rewards or if the targets seem unreachable, the system will quickly unravel and lose the support of the workforce. Transparency is the key to fairness. A clear and understandable system is one in which people know what they have to do and how it affects their rewards. Involving staff in the design of the remuneration package not only affords it some legitimacy among the workforce, it also gives them an opportunity to understand better how it works.
Equity is also important. Individuals are likely to become disillusioned if their contribution in relation to others is not adequately rewarded. Relative worth should be measured as objectively as possible to ensure internal relativities are based on a sound analytical framework.
Consistency in how rewards are allocated is the third element of a reward strategy that will help to determine whether or not staff support it. Although flexibility to make pay awards outside rigid rules is essential in today's business climate, these decisions should be consistent with reward policies and guidelines. As pay expert Michael Armstrong explains: "The guiding principle should be constancy towards ends but flexibility about means."
Figure 3.2: What is job evaluation?
Job evaluation is a process used to determine the relative importance of jobs in an organisation and is commonly used as a basis for positioning jobs within pay and grading structures. Job evaluation results can also be put to a variety of other purposes, including skill needs analysis, succession planning, performance management and external pay comparisons.
Job evaluation schemes fall into two broad types:
Whole-job or non-analytical schemes - where evaluators assess and rank jobs by deciding whether one is more valuable or difficult than another. Under this approach, there is no systematic attempt to examine the particular set of skills or characteristics required by the organisation, or to assess jobs against these. Such approaches can be divided into three sub-varieties: job ranking - where jobs are simply put in rank order; paired classification - where all jobs are compared, in turn, with all others being evaluated to produce a rank order; and job classification - where job descriptions are compared with grade definitions, so that they can be placed into the appropriate grade.
Analytical schemes - in which the elements within jobs, usually described in the job evaluation jargon as "factors", are separated and analysed. Factors can include, for example, physical and mental skills, responsibility, effort and working conditions. Each element is assessed separately by the evaluators to give a total value for the job (a points score). Organisations generally attach varying importance to the different factors and "weight" them so that the more important factors have greater influence than the important ones on the final value of the job. Analytical schemes are thought to offer a higher degree of rigour and objectivity than non-analytical arrangements and are more popular than the non- analytical variety. A 1998 survey of job evaluation by IRS reported that respondents used 20 different types of scheme.36 The most common was the Hay Management Consultants' (analytical) chart-profile method. Only a tenth of employee groups were covered by non-analytical schemes, with whole-job ranking the most popular of these. The survey also found that public sector organisations were more likely to use dedicated schemes.
Work of equal value
Because they tend to provide more consistency and minimise subjectivity, analytical schemes based on points scores offer some defence against equal value claims. An equal pay for equal value case will be dismissed by an employment tribunal at an early stage under section 2A(2) of the Equal Pay Act if two conditions are met:
that the claimant's job has been rated lower than that of her male comparator under a job evaluation scheme, provided the tribunal is satisfied that the scheme is not tainted by sex discrimination; and
that the job evaluation scheme in question is "analytical" - in other words that it evaluates both the woman's job and the man's job in terms of their constituent demand factors, such as effort, skill and decision making.
However, analytical schemes that contain some intrinsic weakness or have been implemented in such a way as to discriminate against women are no defence. Also, job evaluation is only part of the process of determining grading and pay. Even where a scheme is implemented in a non-discriminatory way, discrimination could creep back in at a later stage. Jobs might be allocated into broad pay bands, for example, with men predominantly at the top end, or performance-related pay and bonus schemes might disproportionately favour male employees.
Figure 3.3: Michael Armstrong's 12 steps to developing and installing a broadbanded pay structure
1.Decide in principle that broadbanding is desirable
2.Make an empirical and provisional judgment on how many bands will be required by reference to an analysis of the organisation's structure and the various roles carried out at each level
3.Decide on the band architecture - the width of bands, the degree of overlap, the anchor points and zones
4.Carry out a job evaluation exercise using benchmark (generic) roles to establish band boundaries and provide data on relative size. Revise the band structure as appropriate on the basis of this data
5.Conduct a pay survey to establish market rates
6.Position roles in bands (singly or in clusters) on the basis of relative size as established by job evaluation and by reference to market rates. As always, this will be a judgmental process to establish the relative weight to be given to internal and external relativities - the decision will depend on the extent to which it is policy to provide for market relativities to drive pay decisions
7.Decide on the basis for progressing pay within zones and for adjusting pay levels following a change in role (an expansion of the existing role, or movement to an entirely new role)
8.Decide on the role of job evaluation in defining band boundaries, guiding band positioning decisions and dealing with new roles or equal-value queries
9.Examine the existing rates of pay for individual employees, identify any increases that may be required (immediately or phased), and establish any cases where red- circling is necessary
10.Draw up procedures for managing the structure, including the allocation of roles to bands, the use of job evaluation, the conduct of pay reviews, fixing salaries for recruiting purposes or following a change in role, maintaining data on market rates and the use of performance management processes to assist in making pay review decisions
11.Brief and train managers on the new structure and their roles in managing pay
12.Communicate details of the new structure and how it affects them to staff
Source: Employee
reward, Michael Armstrong (1999), Chartered Institute of Personnel and
Development
1"Airing a grievance: how to handle employee complaints", IRS Employment Trends 726, April 2001.
2"Human resource management on the line", Patrick McGovern, Lynda Gratton, Philip Stiles, Veronica Hope-Hailey and Catherine Truss (1997), Human Resource Management Journal vol 7 (4), pp.12-29.
3"The truth about merit pay", Pay and Benefits Bulletin 501, August 2000.
4Reported in "Public sector pay awards above inflation", Pay and Benefits Bulletin 515, March 2001.
5Incentives for change - rewarding performance in national government networks, John Makinson, Public Services Productivity Panel, HM Treasury.
6Quoted in Employee reward, Michael Armstrong (1999), Chartered Institute of Personnel and Development. ISBN 0 8529 2820 3
7"Paying hard to get", R Corkerton and S Bevan, People Management, 13 August 1998.
8"Asda tries to achieve permanently low staff turnover", in "Staff retention", IRS Management Review 13, April 1999.
9"Merit pay and grading at the BBC", Pay and Benefits Bulletin 396, March 1996.
10"Rewards and bonuses at Gala Clubs", Pay and Benefits Bulletin 513, February 2001.
11"Recognition and reward at Littlewoods Retail", Pay and Benefits Bulletin 482, October 1999.
12"Integrating pay and benefits at NAG Europe", Pay and Benefits Bulletin 511, January 2001.
13"Oracle's software selection", Pay and Benefits Bulletin 500, July 2000.
14"Broadbanding: the introduction of a global reward strategy at Reckitt & Colman", Pay and Benefits Bulletin 456, September 1998.
15The rewards of work, Paul Mulvey, Gerald Ledford and Peter Blanc, WorldatWork and Sibson & Company (2001).
16"There is value in job evaluation", IRS Employment Trends 665, October 1998.
17Study of broad-banded and job family pay structures, CIPD survey report, January 2000.
18"Single status: the story so far", IRS Employment Trends 710, August 2000.
19"How West Sussex led the way on job evaluation", IRS Employment Trends 710, August 2000.
20"BGT partners new deal", Pay and Benefits Bulletin 453, August 1998.
21"Nationwide families", Pay and Benefits Bulletin 495, May 2000.
22"Moving away from a 'Mystic Meg' approach to pay: Bank of Scotland", in "Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
23Employee reward, Michael Armstrong (1999), Chartered Institute of Personnel and Development.
24"Competencies determine annual increases: South Staffordshire Water Group", in "Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
25"Hardwriting competencies to grades, pay: The Royal Bank of Scotland", in "Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
26"Broad bands to control pay drift: Fine Tubes", in "Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
27"Rewarding employees in the 1990s", IRS Management Review 3, October 1996.
28"Anglesey Aluminium: 2.7% pay rise", Pay and Benefits Bulletin 498, June 2000.
29"Rewarding competencies at the Bank of Scotland", Pay and Benefits Bulletin 422, April 1997.
30"Single status at BNFL", IRS Employment Trends 700, March 2000.
31"Ministry of Defence: 4.5% average performance award", Pay and Benefits Bulletin 490, February 2000.
32"Yorkshire Water: merit increase from 3% pot", Pay and Benefits Bulletin 476, July 1999.
33New dimensions in pay management, Michael Armstrong and Duncan Brown (2001), Chartered Institute of Personnel and Development, ISBN 0 8529 2883 1.
34"Employees with attitude", Employee Development Bulletin 133, January 2001.
35"'Hard' competences for career structure, pay progression: Xerox UK", in "Employers' practice in using competencies for pay, progression and grading", Competency & Emotional Intelligence, vol 7 (1), Autumn 1999.
36"There is value in job evaluation", IRS Employment Trends 665, October 1998.
