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Base pay – back to the future?

Base pay – back to the future?

By Ian Nicholls who can be contacted at iain.nichols@eu.watsonwyatt.com

1. Introduction

The publication by the Equal Opportunities Commission (UK) of the ‘Equal Pay Review Kit’ earlier this year has kick-started a rethink on base pay design. In particular, the prevailing focus on market value may be on the wane, with internal equity firmly back on the agenda.

2. A look back

The focus of base pay management has changed significantly over the last twenty years, from grading and internal equity to market benchmarking and broad banding, and finally within the broader context of total rewards.

The trend shows the desire of organisations and reward professionals to obtain the best value from their pay spend, considering both internal needs and external influences (such as the employment boom and skills shortages of the 90s).


>> Internal equity driven

>> Traditional grading structures

>> Pay for job size

>> Job hierarchies

B. LATE 80’S/90’S

>> Focus on external market value

>> Broad banding – job evaluation/grades discarded

>> Pay for contribution/performance

>> Recognition of hot skills

>> Job families


>> Internal equity back on the agenda

>> Best-fit role/reward structure

>> Total rewards approach

>> Transparency – greater employee awareness of reward


3. Factors driving changes to base pay policy

A number of factors are causing organisations to take another look at internal equity, job infrastructure, and market benchmarking.

A. Legislation and regulations (IN BRITAIN)

Many organisations are reviewing their pay policies and structures in the light of the Kingsmill Review on equal value. Responses vary, but some organisations have undertaken full-blown equal pay audits, whilst at the other extreme, some prefer to adopt a ‘wait and see’ approach.

Arguably, the equal value environment encourages organisations to shift back towards tighter grading structures underpinned by job evaluation – a sea change from the prevailing broad banding approach.

B. Internal equity considerations

In addition to the legislative imperative, organisations are finding that issues such as structural complexity, coupled with the growing use of matrix management, complicates the relationship between job, role and reward. For example, the use of ambiguous job titles such as ‘co-ordinator’ makes job sizing and market pricing difficult.

Role and reward comparability is important to employees and, if the shape of reward looks different across functions and divisions, individuals struggle to understand their position and contribution to the organisation. Again, a more detailed, formalised role structure, with clear links to reward may provide a solution.

C. Changing views on market data

There is a growing realisation, accentuated by the current lower inflation environment, that although market pricing is an important input in the reward management decision-making process, it can no longer be the main driver.

Many organisations are beginning to take a more strategic approach to market benchmarking, monitoring cool spots as well as hot ones and being more ‘broad brush’ when market matching roles.

This more detached link to market pay is sustainable but does require the organisation to articulate its position clearly. In comparison, pay management schemes with a direct link to the market are relatively easy to understand and communicate.

4. Rise of the total rewards approach

A number of recent pressures have created a growing interest in managing base pay as part of a total rewards programme. Current economic conditions mean that many employers are focused on managing fixed cost reward as closely as possible. The aim is to contain base pay costs for the majority, whilst rewarding high performers with a mix of higher base pay increases coupled with non-consolidated bonuses.

In the UK, there is also an accelerating shift away from defined benefit pensions, as organisations attempt to control both the associated costs and risks. As a result, employee awareness with regards to their reward and benefits package has never been higher – for the first time, occupational pensions are front page news.

This, in turn, puts further pressure on organisations to articulate why different roles attract different reward.

5. As to the future…

The factors outlined above, particularly current legislation and economic conditions, are causing organisations to refocus on internal equity as the main driver of base pay decisions. In addition, the growing interest in total rewards demonstrates how organisations and employees see base pay as just one piece of the reward jigsaw.

However, organisations should consider their own unique situation and avoid simply reacting to the latest HR trend. We should not be too quick to dismiss the progress made in pay management over the last decade. Broad banding remains appropriate for some organisations as does detailed job evaluation for others. The only common theme that all organisations should adopt is to clearly articulate the rationale for their chosen pay policy and structure.

Perhaps the base pay model of the future should therefore be described as ‘best fit’. As there is no one correct base pay management approach, each organisation should adopt a reward management framework that is best suited to support its strategy and employment deal.

* Reprinted by permission of Watson Wyatt Europe

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Gary Watkins

Gary Watkins

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