Performance related pay - Equal pay
a 'win-win' result for employer and employees
 

The outcomes from one of our recent projects for the R & D division of a multi-national pharmaceutical group, which helped meet people’s needs and  those of the business are shown here. 

Specifically the project:

• met the majority of employees’ aspirations with performance-related increases, averaging 4.88%

• helped meet the Company’s developing strategies of ‘attracting expertise’ and ‘caring about its people’

• saved the Company  £50,000 on a pay bill of £4.7m (c. 200 staff)

• identified a gender gap averaging 19.34%

• produced a plan for eradicating this, based on ‘Just Pay’

• all for a fee investment of £13,000.
  

 

Much has been said and written about the failure of performance-related pay in recent years.  Here is an extract from a project which was begun on 14 February 2001 and completed on 9 February 2002 and which demonstrates that it can be made to work, to the benefit of the Company and its employees. 

My Client is the Research and Development Division of an international pharmaceutical group. 

We benchmarked their pay against market practices and developed a new framework structure to assist the company in determining increases for staff as part of its annual salary review.

We used PrISM© (the Performance-related Increase Salary Modeller) which is one of the modules in our job evaluation software, Evaluator+ ©.  

The software was developed soon after the advent of the Equal Value amendment in 1984; I researched the subject of job evaluation in depth and wrote the specification for this software package.  It helps to determine if employee compensation is equitable under the law. It’s been featured in The Job Evaluation Handbook by Michael Armstrong and Angela Baron (published by the Chartered Institute of Personnel & Development in November 1995) amongst some of the most popular job evaluation software available.

Annual Salary Review

The client introduced a new Performance appraisal system in November 2001.  At the same time it was preparing for its annual pay review and it wanted to establish motivational, yet affordable increases for each member of staff, effective 1 January 2002. The Company asked us to help, using PrISM.

Performance / Merit levels

However, the client was uncomfortable in assigning merit ratings so soon after introducing the new scheme, so, using a very simple rating system described below, the client made the assumption that all its staff were performing at an acceptable level and assigned a ‘C’ rating to all of them with the exception of those whose compa ratio was in excess of 1.20 (the compa ratio is the relationship between an individual’s current salary and the mid point of his / her grade).   This would have the effect of restricting the latter’s salary  increases, potentially providing more money for people paid lower down in the range.
 

The PrISM incremental grid

The increment grid was designed in such a way that individuals who are performing well, but are current paid low in the salary range would receive larger increases than those who are also performing well but are not only paid high in the salary range, but also significantly more than the competitive level the market place was suggesting.  The lower the merit rating, the lower the incremental value.

Conversely, people who weren’t performing, wouldn’t receive any increase at all.

The incremental grid is illustrated in the table below where ‘C = 1.00’ and is given the value 5.5% (the estimated gap between current and market pay from the benchmarking exercise). The lower and upper compa ratios are set so that they capture the lowest and highest paid individuals in the group being reviewed.
 

Involving Heads of Departments

The Director of Human Resources shared the initial results of our work with Heads of Departments.  They were generally supportive of the approach, but a few expressed concerns about some individuals’ performance levels.  A few adjustments were made to the merit ratings and the PrISM reports were run.

PrISM reports

PrISM considers each job holder in turn, grade by grade, his / her merit level and the position of each job holder’s salary relative to the midpoint of the grade ( the compa-ratio).

In just a few seconds PrISM produced the Standard report in which it calculated performance-related increases for all 200 staff; the projected increase in the pay bill of £4.7 million amounted to 4.92 per cent.

With headline inflation in December 2001 at 1.9 per cent, the client decided that this was too expensive;  however, wishing to continue to motivate its staff, the company decided to budget for a 3 per cent increase.

This figure was entered into the software and again, in just a few seconds PrISM produced the Budget report in which it calculated pro-rata performance-related increases for all 200 staff, saving £90,330 or 1.92 per cent of the pay bill when compared with the original report.

Part-time employees

For calculation purposes, all part-time staff salaries were treated as if they worked full-time, in this case, 37 hours a week.    Before the Company increased their salaries it was necessary to pro-rata their salaries to their hours worked.

Promotions

The Client also wanted to promote a number of staff  with appropriate salary increase.  These were dealt with outside the software’s current capabilities.

Equal Pay

The ‘raison d’ être’ for designing PrISM was partly to facilitate performance increases for staff, but more importantly, to help in identifying Equal Pay issues. 

The Equal Pay Report was produced as a matter of routine.

In the table below we show the gender gap, grade by grade, highlighting any gaps in excess of 5 per cent.
 

Comparing averages, as we have illustrated here, may be a fairly imprecise way of measuring the gender gap.  But it is a starting point. Where there is a gap of 5 per cent or more we have suggested that the client takes steps to dig deeper to establish the reasons.  Using the software, it’s a straightforward exercise  which can  be repeated, we would suggest, at least at quarterly intervals.

The figures from the table above are illustrated graphically below:

Reaction to the review

The vast majority of staff are very happy with their salary increases. From the Director of Human Resource’s point of view the review was completed more quickly and efficiently using the software than would have been the case otherwise.  Above all else she felt she was more in control of salary budgets.

‘Brownie points’

‘Thanks for your support, patience and personal commitment.  You’re a star‘. Director of Human Resources,  7 February 2002.

Benefits package

Our brief also included a need to understand how competitive (or otherwise) the company’s benefits package was, but this is not reported in this case study as we wanted to focus instead on the 1 January 2002 performance-related pay review and the equal pay issues that the study unearthed.

What next?

The Company plans to invite us to evaluate all its jobs using our analytical job evaluation software.  It also plans to review its position versus the market during 2002. Thereafter it proposes to substitute our ‘A – E’ merit ratings with its own seven merit ratings of ‘X’ and ‘1 – 6’ before using PrISM to inform its next salary review due in January 2003 when it will focus on narrowing the gender gap which has been shown to exist.  This will be tackled in line with the recommendations contained in ‘Just Pay’ published by the Equal Opportunities Commission in February 2001.

Rob Kenwrick
Senior Partner

The Bryher Partnership
7 February 2002