Set the right pay rates
If you currently employ people, or intend to in the future, you will want to set rates of pay that will encourage potential applicants to apply and keep existing workers happy and motivated. You must also make sure your pay arrangements are not discriminatory.
Setting suitable rates of pay and deciding on pay systems are major decisions that will have a long-lasting impact on your business.
This guide covers what to consider when setting pay rates, including ensuring equal pay for women and men, avoiding potentially discriminatory pay practices, paying at least the national minimum wage, and using pay to recruit, motivate and retain workers.
It also describes the different types of pay-rate systems and schemes.
Advantages and disadvantages of pay-rate systems
When you select a pay-rate system, you are choosing how you will reward your workers.
Basic-rate systems pay workers a fixed amount on an hourly, weekly or monthly basis.
These are simple to operate but do not offer many incentives to workers.
Variable or incentive schemes
Variable or incentive schemes are where all or part of a worker's pay is based on performance, skills, results and/or profits. They could be more expensive if your workers are highly motivated and successful but can also help increase profits.
Incentive schemes can help to generate in workers a long-term interest in the success of the organisation.
They can be based on individual performance, group performance or a combination of both:
- An individual incentive scheme can help to motivate your workers. However, they may become demotivated if they find that their pay isn't as high as they expected it to be.
- A group incentive scheme can encourage team working and a sense of contribution. However, they could also result in unequal performances and in extra payments being seen as the norm.
Examples of incentives for workers
Pay is not the only factor that can motivate workers. The following other incentives can also play a part:
- non-contributory pension schemes
- company cars
- assistance towards childcare
- achieving qualifications
- good work-life balance
Choosing a system
You will need to find the right system or combination of systems to suit your business. Always weigh up the pros and cons of each.
Whichever system you choose, you should try to make it as transparent as possible. This is so that everyone knows how their pay is calculated and how they might get a bonus or any other type of pay enhancement.
Setting up a new pay-rate system
It will almost certainly cost you time and money to set up a new - or even change an existing - pay-rate system.
In the first instance, it could be helpful to set up a checklist detailing the steps you plan to take. Remember to:
- plan the process for selecting or adapting a system
- involve workers, both full-time and part-time
- get expert advice if needed
- agree changes with workers' representatives, if any (or with workers individually where there are no representatives)
- evaluate the good and bad points of your existing system, if you have one
- decide what the objectives of the system need to be, eg increased productivity
- consider the most suitable pay differentials and links for your business
- think about how workers might be able to earn increases to their basic pay, eg through annual increases, bonuses, or other payments based on performance assessment
- communicate progress regularly to all workers
- look out for potential pitfalls, such as changes to pay differentials and scope for discrimination
- make sure the system is properly maintained
- review the system's performance
- ensure women returning from maternity leave get any pay rises occurring in their absence
Making pay comparisons
To make sure you are getting your pay rates right, consider checking whether or not your rates are competitive with other comparable businesses in your industry and region.
Comparisons can be made with other businesses by region, industry or other factors, such as business size through benchmarking.
A number of organisations provide benchmarking information on rates of pay and payment systems.
Regional differences in pay
Almost every worker is entitled to be paid at least the National Minimum Wage or National Living Wage. The minimum wage rates vary according to age but not location, ie they are the same regardless of where you are in the UK.
Read more on the National Minimum Wage and National Living Wage.
However, for jobs and industries that pay higher than the NMW, there are often regional differences in pay rates. Often these can occur because of, for example:
- local problems in hiring and keeping workers
- higher living costs specific to particular areas
Differences in pay across industries
Different factors also influence pay in different industry sectors. Examples include the need for specialist skills or experience, whether the right workers are available, the demand for the products or services, job location and the nature of the work.
Equal pay for work of equal value
The law says that men and women are entitled to equal pay for work of equal value.
Pay in this context includes contractual benefits, eg bonuses and pension contributions, as well as basic wages or salary.
The Equal Pay Act (Northern Ireland) 1970 (as amended) provides for equal pay between women and men in the same employment.
It does so by giving a woman the right to equality in the terms of her contract of employment where she is employed on:
- like work to that of a man
- work rated as equivalent to that of a man
- work of equal value to that of a man
Read more on equal pay - the law and best practice.
Equal pay claims
Workers who believe they haven't received equal pay may lodge a complaint to an industrial tribunal. In the course of an equal pay claim, you may be called upon to explain and justify your pay practices and arrangements.
An equal pay complaint can be decided by an industrial tribunal, or, if both parties agree, can be determined by an arbitrator under the statutory arbitration scheme. Read more about the Labour Relations Agency (LRA) Arbitration Scheme.
For their tribunal claim to be successful, a worker will need to compare their pay to that of someone of the opposite sex (a 'comparator').
There are laws in place to deal with large and complex equal value cases. The laws aim to streamline the system and reduce delays. There are also restrictions on when an industrial tribunal/arbitrator may choose not to consider an equal value claim.
Ensuring equal pay
To ensure that you are paying your workers fairly, you could undertake a job evaluation. This compares the skills and competencies that each type of job requires. With this information, you can determine which jobs are of equal value.
The evaluation must analyse a job by preset factors that apply to all the jobs under evaluation rather than looking at each job in isolation. Avoid basic errors such as assuming jobs that are being done part-time are of lesser value.
With regular reviews of your pay system, you can build and maintain a robust, fair pay system that stands up to scrutiny and is less susceptible to claims for equal pay.
Advantages of reviewing pay rates and systems
You should review your pay systems on an ongoing basis. It is also important to check, at least annually, that your pay rates are competitive.
Advantages of pay reviews
If you regularly review your pay systems, you can check whether or not you are achieving objectives such as cost control, team working and increased productivity.
Other benefits of regular reviews are that you can:
- address the effect of factors such as regional changes, industry developments or skills shortages
- incorporate the impact of new machinery or technology on your business, such as new skills requirements and new roles
- review hiring and training policies - see advertising a job and interviewing candidates
- prepare for changes required by legislation such as revisions to national minimum wage rates
- review feedback from your workers on whether your pay rates and systems are fair and act as incentives
- incorporate changes in employment contracts
- act on decisions from collective bargaining - see how to work effectively with trade unions
- ensure you keep in contact with people on a break, eg maternity or adoption leave
- find and close any loopholes that might otherwise have led to claims of pay discrimination on the grounds of eg gender, race, status as a part-time worker
You may wish to consider reducing differences in pay structure between categories of employees.
This process - called harmonisation - can often be beneficial and be utilised throughout your business.
Where this is likely to result in a reduction in an employee's pay, you must seek agreement to the change in the first instance. You should also be aware though that harmonisation in a situation where there has been a TUPE transfer will almost certainly be unlawful.
See how to change an employee's terms of employment.
Consulting your workforce when reviewing pay
You may consider involving workers' representatives in your pay reviews. This encourages feedback and helps you to hear of any problems they are facing.
Alternatively you could set up a pay review committee, which may or may not include workers' representatives, that meets regularly to consider pay-related issues.
Commission, bonuses, tips and gratuities
When you choose a pay system for your business that pays - or partly pays - by results, you will need to consider what form those payments will take.
Commission is a payment based on the individual worker's or team's performance. It is common among sales workers to provide an incentive to sell. Because they earn commission, they often have lower basic salaries than other workers.
Some workers are paid by commission only. If you choose purely commission-based pay, or pay which is part basic pay, part commission, you must ensure that a worker is always paid at least the national minimum wage.
Bonuses are generally linked to performance.
They can be based on one or more performance measures such as financial results of a business, team and/or individual.
Tips and gratuities
Tips and gratuities are commonly paid to workers in the hotel and catering trade. There are some circumstances when tips and gratuities can count towards the national minimum wage. For further advice on this, you may wish to contact HM Revenue and Customs (HMRC).
These payments can be distributed to workers in a number of ways:
- directly from customers
- as a share of a pooling arrangement
- as a share of service charges paid by customers to the employer
Most money payments that are similar to salaries or wages must have income tax and National Insurance contributions deducted. See pay: employer obligations.
If you choose any of these methods of payment, you should also make sure that the system boosts performance and effective teamwork and does not lead to harmful rivalry between workers.