The cost of living is rising and many people are facing financial difficulties. Tax increases and energy prices are the main culprits causing the majority of people feeling much worse off after payday. Financial struggles can cause many employees to ask for increased pay or even look for employment elsewhere, posing a real problem to employers.
Employers may decide to increase their employees’ pay by a percentage across the board, to support them with rising costs.
However, an employee may be eligible for a pay rise, irrespective of external economic factors. To gain an understanding of when a pay rise should be considered, it is important that we first explore the many factors that can influence pay.
The pay awarded to a job will be influenced by a range of factors which will vary greatly between roles and organisations, the most common being:
Seniority
Seniority is a major determinant of pay, which can be determined by a level or rank of the job in the organisation. Levels can be created by some form of job evaluation scheme, whether on the basis of a whole job evaluation (which is likely to be applied on an intuitive basis in smaller organisations), a ranking system or a system using a points factor basis.
Size of the organisation
The size of the organisation (as measured by turnover/revenue and/or number of employees) is very relevant for senior jobs, less so for junior ones. As a rule of thumb the size of the organisation is fundamental for setting the pay of directors and very important for senior managers.
It is also important for the pay of middle managers and of some relevance for lower levels of management. It becomes less influential the lower down the organisational structure and although it may have some influence in the setting of pay for clerical and operative jobs, this would typically only be obvious in the smallest and largest organisations.
Industry sector
For specialist or senior jobs, the industry sector within which an organisation is operating will probably have an influence on the pay. Some industry sectors tend to pay more than others and some have notoriously low pay. This may appear unfair but the market sets pay levels as much for the industry within which an organisation operates as for the function of a job within an organisation.
The industry sector will have a fundamental influence for senior jobs where the knowledge of the product and industry are pre-requisites to being able to deliver satisfactory performance. However it will also have general impact for non-industry specific jobs at the same level.
For example, pay in the computing industry has tended to be above average: pay for non-computing jobs working within the industry (eg support roles in HR, finance and marketing) tends to also be higher. The pay for an accountant in a computing company will be influenced by the market for accountants and also by the general pay levels within the organisation, which again will be influenced by the industry, amongst other things.
A specialist sales manager in this same organisation might need to be recruited from a very small and competitive market place.
The pay for this job could be considerably above that of the accountant at the same level and may even need to be well above the median or even upper quartile level to recruit the person who has the right combination of skill and experience. This would be the case when it is necessary to recruit from a high paying competitor company.
Location
The location of an organisation may influence the pay of the jobs within it. For junior jobs, such as clerical and operative staff up to junior management or, in some cases, middle managers, the immediate location will be the marketplace for jobs and unless there is some other factor, such as a specialist industry, pay levels will be driven by the location above all else. In this case the town or county will be the driving factor with others being of little or no influence.
Deciding on the relative weight of these factors
The best way to think about the factors which will influence the pay of a job is to consider where and how you would advertise to recruit into the job. If the local paper would be the typical place, the location is most important.
If the role is for a specialist, where industry-based trade magazines and search and selection companies would be the likely recruitment method, industry, region and company size are the driving factors.
In other words, think about the competitors in your labour market for the type of employees in your organisation. Do you recruit from, and lose employees to, other local employers or other competing organisations in your sector?
Inflation indices
The ‘all items’ measure of inflation, the RPI, is the one still most commonly used in pay awards and pay bargaining. In almost all long-term pay agreements, the RPI is the quoted source of the uprating in year two or year three. Over the years, governments have tried to influence pay decisions with new indices, such as RPIX, and earlier the TPI (the tax and price index), but neither of these had any noticeable impact on decisions.
In addition, the Annual Survey of Hours and Earnings produced by the Office for National Statistics gives changes to basic pay and earnings levels and the quarterly Inflation Report of the Bank of England contains some analysis of average settlement levels.
Pay settlements are not evenly distributed through the year and tend to occur most commonly in January and April. The period from August to December may be quieter and figures based solely on this period may be misleading.
Salary Benchmarking
The most effective way of analysing whether or not an employee requires a pay rise, is salary benchmarking. Not just limited to being used as a tool for staff retention, salary benchmarking is also a great tool for company growth. By offering a salary that meets the standards for the location, sector and job role, the candidate can have total peace of mind when applying to work for you, that the pay will meet their expectations.
We offer an impartial and cost-effective salary benchmarking assessment for employers, find out more here.
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