In April the National Living Wage for those aged 23 and above will increase to £11.44, a 9.8% increase from £10.42. The increase will also apply to those aged 21 and 22 who currently earn the National Minimum Wage. Subsequently, the Real Living Wage and London Living Wage have also increased by 10% to £12 and £13.15 respectively. Although this is positive news for many individuals, it’s also leaving many companies facing high salary bill increases from April - many of them for the second year in a row.
These same changes are also impacting pay structures. With lower pay ranges being squeezed, the differential between managers’ pay and the pay their teams are getting is being eroded, which is posing two key questions for HR and business leaders:
- How can we incorporate the NLW increase while preserving the pay differential between managers and their teams, without simply uplifting everyone with unaffordable cost increases?
- What is a reasonable difference between a manager’s pay and their team’s?
While there are no definitive answers, there are steps companies can take to help navigate their way through.
- Understand the existing picture
When supporting clients with projects of this nature we always recommend starting by taking the time to properly understand the current picture. What are the existing pay differentials between managers and their teams? What are the objectives of the pay review? Is the objective to address any differentials that don’t seem proportionate, or to manage costs as effectively as possible while not significantly changing the existing picture? Defining this properly will set the framework within which to move forward.
- Consider simplifying your pay structure
One option might be to simplify your pay structure. Companies with a large number of pay ranges can often find themselves in a ‘squeeze’ situation where the lower pay ranges become compacted. If there are other aspects of your pay structure that aren’t currently working, perhaps now is the time to review that structure and consider reducing the overall number of grades or ranges. This can end up giving a clearer distinction in pay for roles at different levels.
- Use job evaluation to objectively compare the size of roles
The pay differential between a manager and their team will depend on the roles in question and should reflect the difference in the size of the roles. A robust job evaluation framework enables an organisation to objectively size roles based on a range of factors: the expertise needed to perform the role, the complexity of the role and the impact the role has on overall organisational performance. Having this oversight gives clarity and context around the difference between a manager’s role and that of their team, enabling HR and business leaders to better understand and justify whether or not a difference in pay is proportionate.
- Use market data to understand typical differentials
Market data can also help understand what a typical pay differential between a manager and their team might be. This broader industry insight is useful to guide decision-making around the difference a company wants to achieve. Depending on the difference between its current situation and the market, a company can decide how achievable it is to make changes in the short term, or whether it should phase increases in over a period of time.
In going through this process and using market data, you can also review how individuals compare to the market. A small differential may be caused by a team member being paid high versus the market, or their manager being underpaid compared with other people in similar positions. This could be caused by length of service, performance-based increases or legacy agreements but market data can help bring clarity to what is ‘typical’.
Innecto can support here in sourcing the right data, matching your roles internally and against the market, and displaying the analysis in our pay benchmarking tool PayLab, which allows you to gain complete clarity around your current and aspirational pay stance.
- Consider the total reward package
Finally, consider the total reward package when reviewing differentials in pay or considering what is proportionate. The difference in salary between a manager and their team may look relatively small before taking into account their total earnings including bonus or commission earnings, and also their pension, holiday entitlement and other benefits.
If you would like to learn more about Innecto’s revolutionary pay benchmarking solution PayLab, job evaluation tool Evaluate or end-to-end pay review solution Advance, get in touch with us today and talk with one of our consultants.
Also by Cathryn Edmondson
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Innovating with pay strategies – thinking outside the box when under inflationary pressure
