A conversation that most business owners dread is when they are approached out of the blue for a payrise by one of their employees.
Especially if this is coupled with the unwelcome news that the person already has a job offer somewhere else!
Of course, you can simply agree and hope the problem goes away. Which it won’t – as you have simply kicked the can down the road.
Getting your pay strategy right
But what if you can’t play Santa at this point? Business isn’t looking good….and you simply can’t afford it. Either way, its good to be prepared for this eventuality, because it will come along.
The best way to handle these requests is to avoid the need for them in the first place. And that means, planning your compensation strategy from the word go.
If your employees know that they are fairly rewarded both compared to their peers, the job market, and for the work that they do, you can head off these unpleasant conversations.
Air’s top tips on paying people the right amount
- Benchmark. Ensure you benchmark all salaries when hiring. Whether you pay for this service or use free resources, the key is to be able to be transparent about the figure and be able to defend it. In practice, its very difficult to benchmark all roles, especially if your business is small, doing something unique in the area or you don’t have the services of a dedicated compensation and reward department. We recommend using a resource like payscale, its free for single searches and you can get more detailed reports for a fee.
- Maintain internal consistency. The worst possible scenario is to have several people, doing essentially the same job, but being paid vastly different packages. This can happen for legacy reasons, or simply poor management. It could also be, unfortunately, a result of discrimination. It may be that some individuals possess specialist skills and knowledge, more experience, or have greater potential. It doesn’t matter what criteria you use to discriminate between people, as long as it is fair and transparent and commercially relevant. If you don’t, you lay yourself open to charges of favouritism, bias, and a whole host of other problems. Not to mention in the worst case scenario, you could be liable for discrimination if your employee can show that you are paying them less due to a “protected characteristic” such as race, sex, age or sexual orientation. Download a free equal opportunities policy template here and make sure you stick to it!
- Free yourself from the “ratchet effect”. Being consistent helps you avoid the situation where employees find out what their colleagues are paid and demand a rise to match that. The effect on employee morale and productivity of this type of situation is devastating. The best run businesses usually have some form of salary banding process. This doesn’t have to be bureaucratic but done properly, is an essential management tool.
- Be clear about the progression strategy for each person. Have open and honest conversations about their prospects. Link this to their performance. Everyone working for you should know what they can do to increase their compensation and still stay working for you. It might be by bringing in more business, improving their skills, or becoming more productive. But it should not be a mystery to anyone why they are paid more or less than their colleagues.
- This doesn’t mean that you necessarily need a totally transparent compensation and pay structure. Radical transparency isn’t for everyone, but it’s entirely possible to maintain openness through grading and salary banding without actually revealing pounds and pence of people’s take home pay.
- The other point to remember is that you need to communicate to employees the true value of their total package, including pensions, and other benefits. Sounds a bit obvious doesn’t it, when you are giving them payslips. But the CIPD found that you could be wasting your money if you fail to point this out. And we’ve certainly experienced situations where management has spent hundreds of hours structuring bonus schemes that nobody understood, and even when they paid out, did not serve to motivate or reward adequately. Find out more about effective and inexpensive ways to reward your employees here.
- You must review pay regularly. Your employees will expect an annual increase, if this is usual practice, especially when the economy is doing well. Even though you state that this is discretionary, if you have been doing it for a few years it becomes factored in, and failure to do it will lower morale. Again, don’t just pluck a figure out of the blue. Think carefully about the prevailing economic conditions, what your business can afford and the likely prospects. Take care explaining this to your employees, so that they don’t think you’ve just done it on the back of an envelope.
- Take great care setting up bonus schemes. If they are awarded like clockwork each year, they rarely motivate above and beyond the intrinsic motivation of doing a job well and being genuinely recognised and appreciated by peers and leaders.
- Lead by example. If your people see you flashing your cash around, but not sharing the gains of the success of the business, they will quickly look elsewhere. Of course, they expect you as the owner, or leader to be well paid, and set an aspirational tone. But if your stated values and culture are about equality and fairness, and you aren’t paying people decent wages, don’t be surprised if they complain.
Handling that payrise request.
If you have done all of the above, you are in a great position to discuss openly with the person who has come to you. It may be there is a genuine reason why they deserve a pay rise based on these factors. If not, you have a clear reason to defend your pay decision and decline. No-one wants an employee to walk out, but you should be absolutely confident everyone is paid what they deserve. If they are, not only will you lower the risk of arbitrary pay rise requests, but will also be in a good position to defend the logic of sticking to your guns.
Find out more about why employees leave your company and get other free HR advice on Air’s blog.
