Pay transparency:
because they're worth it

30th August 2017

It’s hard to escape talk of pay when it’s so often reported on in the press. Over the past few weeks, the subject of reward and who gets what has been widely discussed. Take the BBC and their 18% gender pay gap, or the call by Lord Adonis to cut fat cat pay amongst university vice-chancellors, it’s all been analysed. This week brings further debate with the announcement that big corporations are going to have to start disclosing top and median pay within their organisations.

The ratio between the CEO and your average Joe worker is clearly a talking point and it raises eyebrows first and questions later. Whilst the High Pay Commission reckons the new rules that come into force next summer are a big deal, the TUC and others believe the whole move towards greater transparency has been watered down.

Pay has always been a controversial topic. There’s no getting away from the fact that what people earn around you is going to produce some level of emotion. As Brits, we’ve never been good at being open about what we get paid. It’s not polite to ask and rarely do people volunteer the information. This is not necessarily the case in other countries, but it’s something we struggle with here.

As co-author of this year’s CIPD Reward Survey (due for publication in October), we’re in the middle of putting the finishing touches to our own report on reward management. Without divulging the findings, the study has thrown up some interesting questions around pay transparency and I’ll be sharing these with you later in the year.

In broad terms though, we want pay to be fair. Cast your mind back to Scientific Management Theory and the great Frederick Taylor himself talked of “getting a fair day’s pay for a fair day’s work”. In the early 1900s and beyond, Taylorism came to define the notion that people should be paid for what they do. But it’s hard to quantify that in today’s knowledge-based economy and understand how ‘market value’ translates into your pay cheque.

Fairness and equity around pay – or at least perceptions of it – are good for business. No organisation wants to be condemned for paying poorly at the bottom and too generously at the top. Sports Direct is a good example of how it can go wrong. Indeed, many companies now brand themselves as 'living wage employers' and for some adopting these new policies has been an expensive but necessary challenge – particularly for small businesses.

Ultimately, what a successful pay strategy comes down to, is whether people feel they are getting what they deserve. Businesses do fall on tough times and it’s hard to compete if you’re a small fish surrounded by killer whales. That magic money tree can be rather elusive. However, there is a compelling argument for just being honest and transparent.

So how do you set pay? There are a range of factors that play a part in determining what someone is worth in monetary terms. At its heart, a good reward strategy should consider how it incentivises a team and motivates them to perform to their best. After all, it’s hard to argue against rewarding good performance. However, a number of organisations I have been involved with are now reviewing the link between performance and pay. This is largely because it’s become harder and more complex to demonstrate – in an age of transparency - how decisions are made. The performance review has been the ‘go to’ tool for establishing pay progression for many years. But this relies heavily on line managers getting it right and managing performance effectively. It also relies on an objective assessment of someone’s input and value to the business – which in anyone’s view can be subjective – despite the use of job evaluations. Value is very much in the eye of the beholder!

There have been calls to abandon the appraisal and its link to pay, but an alternative to assessing performance and therefore setting pay, doesn’t seem that visible or apparent. Quite often, a lot of tinkering around the edges takes place in order to improve performance reviews and make them fit for purpose. But carrying out an annual appraisal still forms a key part of a line manager’s role and it looks like it will continue to do so for some time to come.

Market rates also play a role in setting the pay strategy. Although this can often be exaggerated and line managers would do well to remember that ‘the market’ is itself a social construct. Of course, firms need to examine what competitors are paying, but the ‘going rate’ is often used as a bargaining chip when a recruit negotiates their way into a business – particularly at a senior level. Clearly, we live in an age where the talent pool is ever changing and in some cases, ever depleting. A recent article by Larry Elliott predicts a hollowing out of the job market as artificial intelligence takes hold. Coupled with the impact of Brexit and the potential loss of lower waged labour, the skills employers are looking will come at a price if firms are to attract and retain key individuals. Nevertheless, it’s a bit lame to rely solely on the old ‘market dictates’ argument, when setting pay. Conversely, when you ask firms where they position themselves, rarely do they admit to paying in the lower quartile – even though the laws of distribution mean that twenty five per cent should be there!

Irrespective of the market, an organisation must be able to afford their staff costs. Ability to pay is still an overriding factor when it comes to determining what someone gets, but this should be viewed in the round. If pay is low, high staff turnover can be expensive and cause reputational damage. It can also hamper performance and dilute your cultural values if you’re constantly losing people to your competitors.

The use of non-financial reward measures or total reward packages can often be implemented to help ease the strain on burgeoning pay budgets. The public sector have had to adopt more innovative means for rewarding employees, as the one per cent pay cap creates an obstacle for attracting talent. By offering a range of non-financial benefits that staff can pick from to enhance their own lifestyle choices, organisations can use thesestrategies to help retain employees. Flexible working, help with childcare costs, time off for good behaviour, can all help bolster performance.

But don’t be fooled that these are equal alternatives to a decent pay packet. I have often witnessed employees bemoan their lack of take home pay and heard line managers defend their policies by reminding staff that the Christmas party was on the house. Or that all expenses paid trip to Reykjavik was part of the deal. Jaunts and freebies will only get you so far. Some staff members have commitments – the family day at Legoland was good fun, but it won’t pay the mortgage.

Ultimately, what a successful pay strategy comes down to, is whether people feel they are getting what they deserve. Businesses do fall on tough times and it’s hard to compete if you’re a small fish surrounded by killer whales. That magic money tree can be rather elusive. However, there is a compelling argument for just being honest and transparent.

Explaining how pay decisions are arrived at is key. Discussing with employees how they can progress through the pay bands or hit the necessary targets to qualify for a bonus, is also important. People can be turned off very quickly if they feel they are being manipulated. Myths and stories may emanate out of lies and half-truths, but they spread quickly and set the tone. Be open and myths quickly lose momentum.

In summary, pay transparency is quickly gathering pace. Recent political and economic events have demonstrated a need for greater openness and clarity across organisations. If transparency is embraced correctly - rather than reluctantly - it could help strengthen reward strategies.

Ultimately, what a successful pay strategy comes down to, is whether people feel they are getting what they deserve. Businesses do fall on tough times and it’s hard to compete if you’re a small fish surrounded by killer whales. That magic money tree can be rather elusive. However, there is a compelling argument for just being honest and transparent.