8 key elements for designing a fair pay policy

Are you thinking of renewing your company's pay policy? In this article, we explain how you can create a document that meets the needs and interests of today's professionals, and also helps improve business results. 

What’s the definition of a pay policy?

A pay policy is a set of principles and directives that regulate employee remuneration. It ensures that your salary budget is distributed more equally, taking employee performance and the objectives achieved into account.

The main reason many organisations decide to design an internal pay policy is to guarantee a system of fair pay for everyone, and that's also in alignment with company strategy and objectives.

So, the main objectives of human resources pay policies is to:

• Attract and retain talent.
• Satisfy the financial needs of the workforce.
• Guarantee fair and equal pay.

Characteristics of a pay policy

And what characteristics should a pay policy model have if it’s going to work? Here’s a list of six requirements it should fulfil:

• Participative: any pay policy should be mutually agreed and accepted by employees or their representatives in the company.
• Coherent: it should ensure that employees in the same category are paid the same. Remuneration must be internally coherent to guarantee a good working environment.
• Individualised: your pay policy should take each employee’s individual results and accomplishments into account, while also maintaining coherence within the company. It's essential to find the balance between fixed and variable pay.
• Competitive: pay must be in line with the market if the company wants to attract and retain talent. This also helps to reduce absenteeism, staff turnover and stimulated employee commitment.
• Understandable: it should be easy to understand for all workers.
• Permanent: the salary policy should last a long time, and you should avoid having to change it constantly.

Element of a pay policy

A company pay policy should consider the entire range of payments employees may receive for their work. Some of these are monetary, while others fall into the non-monetary category.

Let's look at them in detail:

Fixed base salary

Fixed salary is the main element of a pay policy because all employees will receive at least some amount of fixed salary. The amount they receive will depend on their job role, experience, responsibility and market salaries.

Variable pay

Variable pay takes the form of additional payments that always depend on the results an employee achieves. Some of the main objectives of offering such extra results-based payments are:

•   Acknowledge an employee’s contribution to the company’s success.
•   Reflect individual efforts and results.

When developing a policy, it's vital to specify the requirements employees must fulfil to obtain these extra payments and the corresponding amount in each case.

Benefits and perks

Pay policies can also include benefits and perks such as pension plans, private health and training. Perks are products or services that cannot be exchanged for cash and offered by the company to improve employees' quality of life.

They are offered as benefits in kind and complement an employee’s salary. Flexible benefits, on the other hand, are a scheme where employees can choose the benefits that most interest them. These usually have an equivalent monetary value and are often “deducted” from an employee’s salary in the form of a “salary sacrifice.”

Some of these benefits are tax-free, although this depends on whether the company provides them for everyone, where the services are provided and if they are part of a salary sacrifice scheme, or not. Employers will still have to pay National Insurance (social security) payments on benefits in kind, while employees do not.

Termination payments

When a company decides to end an employee's contract early, they have an obligation to settle the final payment. The law will determine the date and amount of payment in each case. However, the company can decide to compensate the employee about the official figure if it wishes. And this must be reflected in your pay policy.

Elements to consider when creating a pay policy

All HR pay policies are based on a series of parameters and fulfil a series of requirements to meet its objective: to set up a fair system of pay within the company.

If you want to design an effective pay policy, here are some of the most important aspects you need to take into account:

Company location

The company's geographical location is a crucial factor in any pay policy. When a business is located in a big city, the cost of living and transport is usually higher. So, with this in mind, it's understandable that salaries would also need to be higher.

Collective agreement

Always check the collective agreement relating to your company’s sector, as it will often regulate salary ranges for the different roles and categories. Companies must respect the content of this document, as they would otherwise be breaching their legal obligations.

The company’s financial situation

Designing your company’s pay policy in line with its financial situation is considered best practice. So, it’s vital to take your company salary budget into account. Make sure your policy is viable to avoid future budgetary problems. It's always better to set realistic figures and stick to them, rather than having to backtrack later on.

Groups and categories within the company

When planning a policy, the HR Department must be clear on the professional groups and categories within the company, as well as defining their tasks, responsibilities and skills. The main reason for this is to ensure a fair and coherent sounded distribution.

Individual employee circumstances

As we mentioned earlier, your pay policy needs to be flexible and take each employee's situation into account, to ensure they receive the appropriate salary. Some examples include their age, contingency, time served in the company, and specific needs.

Employee effort

Your policy must, of course, set out how your employees' efforts and results will be rewarded. Setting objectives that are based on effort, commitment and productivity is essential. These are key aspects of the company's success. Ultimately, your policy should reward those that are motivated and do a good job.

Salary range

Once you've defined the previous parameters, you'll then need to create salary ranges to set employee remuneration. These establish a minimum and maximum salary for each of the different levels in the company’s organigram.

Employment policies

Your pay policy should take into account any increases that affect base salaries. These include CPI fluctuations, salary reviews, and any other employment-related measures that may be imposed. All this helps create a solid remuneration system in the company.

Trends affecting pay policy

The job market is constantly changing, as are employee needs and preferences. Businesses need to stay tuned to this and adapt to create effective pay policies.

These days, we know that salary isn't enough to motivate professionals: they're looking for more than that. So, this requires incremental innovation as new trends emerge within our pay policies.

Emotional salary, for example, that is geared towards employee well-being and motivation, is becoming increasingly important. It improves the work climate, strengthens commitment, reduces absenteeism, boosts creativity and productivity.

Offering flexible working or the option to work remotely significantly influences professionals looking to improve their work-life balance. These factors can sometimes tip the balance when choosing between one company and another.

Ultimately, the most important thing is that a company’s pay policy is a living document, and in touch with the trends and needs of professionals.