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• What starting pay to offer.
• How often and by how much pay should be increased.
• Whether bonuses or rewards for performance be offered, or other work related pay benefits be given, to attract and keep the best staff.

Many small businesses have no formal pay system in place and rely on historical pay rates, market trends or competitor pay rates, or the negotiating skills of individual employees when deciding on rates of pay. This can be extremely damaging though as pay bills can be difficult to control and can also be discriminatory, leading to poor staff relations and affecting staff turnover.

Although people at work are motivated by more than just pay, workers who feel that they are rewarded fairly in terms of the pay and benefits they receive are less likely to be resentful or dissatisfied.

The most common types of pay systems are base pay or variable pay systems.

The table below indicates the features commonly found in each:

Base pay schemes are generally straightforward to administer. They allow employers to predict what their wage bill is going to be and are the type of scheme least likely to discriminate, where employees do identical or similar work.

Variable pay schemes allow the amount paid to an employee to vary from time to time. This can make it much more difficult to predict what your wage bill will be in the future, and staff may have less certainty about the amount of pay they are due. Variable pay can be linked to individual performance, or to collective performance based on teams, groups, or the entire business meeting specific goals and targets.

Variable pay can, in some circumstances, help motivate staff to increase productivity or reach targets. However, staff are also motivated by factors other than pay such as a pleasant working environment, good supervision, opportunities for training and development, consultation, and good work-life balance.

It is very easy for indirect discrimination to creep in to a variable pay system, and ongoing monitoring and evaluation is needed to make sure that this does not happen.

The need to introduce or develop a pay and reward system may arise when a business grows and more staff are taken on. Changes can be required to existing pay systems because of a change of ownership to comply with the equal pay law or so that a business can enhance their reputation as a fair employer.

To help avoid staff dissatisfaction or disputes, it's important your people know how their pay is calculated, and any pay and reward system should be clear and easy to understand. It is also essential that your pay system does not include any features which may lead to unlawful pay discrimination.

Even in a very small business, a structured pay system is easier to monitor and control, and is more likely to provide equal pay than a system which relies on managerial discretion.

Pay systems often include a grading structure, which provides a framework for managing pay and reward. A grading structure provides the same level of pay across groups of workers who are doing work that requires similar levels of effort, skills, knowledge, and responsibility. Each grade may feature a number of steps, levels or increments which allow pay to be increased at a specific point in time, or when some other specified criteria has been met by the staff concerned.

The table below provides an example of a simple pay structure, which features grades with pay ranges set for each grade.

Different grading structures suit different businesses, but in every case consider how many pay grades are appropriate (for example, A to E). Pay grades, sometimes called job families, may include jobs related to each other (such as IT, or administrative jobs), but whether related or not, jobs should be placed within a grade on the basis that they have been identified as involving similar levels of effort, skills, knowledge and responsibility.

Also consider how many pay levels, steps or increments are appropriate within each grade. Care must be taken to ensure that the number of steps or levels within each pay grade can be justified, by meeting criteria which are fair and relevant to the work carried out. Including too many steps or levels on the basis of experience, for instance, may lead to unfair pay discrimination if this cannot be justified.

Example

A pay grade includes 10 annual increments or steps, and the justification for this is experience in the job. However, it takes only two years to become fully proficient in all aspects of the job. In such a case, the number of increments or steps cannot be justified on the basis of experience alone. This type of practice is potentially unlawful on the grounds of age and sex.

There must also be consistency when placing staff at a particular pay level, increment or step. For example, placing new staff at a higher level within the pay grade on appointment because they have negotiated a higher starting salary, can potentially lead to unfair pay discrimination.

You also need to check whether there is any overlap in salaries across different grade boundaries. Overlapping grade boundaries may lead to unfair pay discrimination, as an employee in a lower grade might be paid more than someone in a higher grade for work of that is of equal value.

You should also consider:

• Whether the existing system could be adapted or improved.
• Whether the system you intend to adopt could discriminate, directly or indirectly, against women or men.
• Keeping records of all discussions and any decisions made about the system.
• Monitoring your new or modified system on a regular, ongoing basis.

Involve your staff and their representatives in the process as much as possible. Taking time to consult the people who will be affected can be extremely beneficial to the process, and help ensure acceptance of the proposed changes.

There are different types of reward systems, some which can be linked to the performance of individual staff members and some to the performance of groups or team performance.

For instance:

• Annual ‘across the board’ pay increases or increments, for example, where everyone gets a 3% increase.
• Annual pay increases or increments, supplemented by a reward payment, for example, everyone gets 3% plus an individual bonus.
• Fixed incremental scales with limited flexibility, where the pay increases for the majority of staff are set but payments can be increased for exceptional performance, or reduced for poor performance.

• Unsatisfactory = 0% increase
• Satisfactory = 2% increase
• Above average = 3.5% increase
• Exceptional = 5% increase

Individual Reward Systems

Some organisations use an individual reward system which is more commonly known as an annual appraisal or performance related pay scheme. It determines individual performance against targets or objectives.

Individual rewards or performance related pay should be treated with caution as these are areas where unlawful pay discrimination can easily occur.

If you have an existing individual reward system, or are thinking of introducing one, the following list of questions can be used to find out whether the elements that can help ensure it is as fair and effective as possible are in place.

• Have managers or staff involved in operating your individual reward system been trained appropriately?
• Have staff, and staff representatives, been fully informed about how the system will operate?
• Has sufficient time been allocated to conduct reward reviews?
• Are objectives related to performance specific, realistic, achievable and measurable?
• Are the assessment periods here appropriate?
• Do staff have access to, and can they comment on, their assessment score?
• Do you have a monitoring and review system in place?
• Do you have an appeals system in place?

When individual performance is being assessed in relation to reward, subjectivity or personal bias must be avoided. The assessment process must be scrupulously objective, and staff must have a clear understanding of what they have to do to achieve the individual reward offered.

Objective setting

Before performance related pay can be introduced, a structured and transparent method of assessing staff performance must be set up.

Objectives or targets to be met by staff must be achievable, fair and appropriate to the type of work carried out by the staff members involved. Objectives or targets may be based on quantity or quality, or a combination of both.

Objectives should be set following discussion and agreement between individual staff members and managers, at the start of a set period of time. This is usually annually.

Staff performance, and the extent to which the objectives have been met, are assessed at the end of the set period and rated against one of the agreed overall standards of performance. An example of performance standards commonly used in individual reward systems:

Example

• Very good - a very high level of performance; agreed objectives consistently achieved.
• Satisfactory - a fully satisfactory performance meeting all or nearly all objectives.
• Less than satisfactory – insufficient objectives have been met, and the individual needs to improve skills or effort, or both.
• Wholly unsatisfactory - the basic requirements of the job have not been met and little or no progress has been made towards agreed objectives.

The amount of the performance award is based on the performance level achieved by the individual concerned.

When assessing performance, appraisers should take into account that not all of the objectives set may have been achievable. Changes in circumstances during the appraisal period may have made it difficult for employees to complete some of the tasks planned.

Managers conducting appraisals should meet periodically throughout the appraisal period with the staff members being appraised. This allows objectives to be revised, to reflect changes which may have arisen, for example, within the operating environment of the business.

What is a reward system?

A reward system uses pay incentive schemes, such as bonus systems or variable pay based on performance, with the aim of motivating staff.

Discretion in reward systems

Any element of discretion in awarding bonuses can be highly vulnerable to bias. Stereotypical views and attitudes to the value of different types of work and staff, including perceptions about what is 'women's work', may influence decisions, whether consciously or not.

Employers and managers are often unaware of the impact their decisions may have on providing fair and equal pay, and the effect that this has on staff morale.

Avoiding discrimination in reward systems

Transparency in pay systems is an essential factor in uncovering and tackling unlawful pay discrimination. The more complex and less transparent the system is, the more vulnerable it will be to pay inequalities. A transparent reward system enables staff to understand not only their rate of pay, but how any reward system operates. It also helps minimise uncertainty or perceptions of unfairness, and reduces the possibility of equal pay claims being brought against a business.

Anyone given discretion to award bonuses, commission, and performance pay, or who has responsibility for implementing pay and reward systems and carrying out reviews should be fully trained in the reward system itself, and in the equalities aspects of pay and reward.

Avoiding discrimination when establishing criteria for reward systems

When setting criteria for a reward system, avoid those which may be more difficult for one group to achieve than another.

For example, using length of service alone as a criterion for determining pay or reward is potentially discriminatory. Women are more likely to have caring responsibilities and may have breaks in service because of this. They are generally less likely to meet a long service requirement.

Similarly, a requirement to work non-standard hours, or to work hours which are variable at short notice, could also potentially discriminate against staff with caring responsibilities. Some of these factors may discriminate on the grounds of age or disability, which would also be unlawful.

Discrimination and part-time staff

The majority of part-time workers are women. It is unlawful to discriminate against part-time workers and this group of staff should not be excluded from reward schemes. Part-time workers are normally entitled to payment at the same hourly rate of pay as full-time workers when they are doing work which requires similar levels of knowledge, skills, effort and responsibility.

You should ensure that targets in the reward scheme are not impossible for part-time staff to achieve. Where awards are made on the grounds of ‘outstanding achievement’, assumptions should not be made about the commitment of part-time staff which may potentially exclude them.

Avoiding stereotypical views

When developing a reward system, ensure stereotypical views are not represented in the competence criteria. These should not favour attributes and roles perceived to be 'male' (for example, assertiveness, leadership, decision making skills) or 'female' (for example, co-operation, communication, listening, caring) but should be balanced and unbiased.

Run a pilot and evaluate

Running a pilot of a proposed reward system means payments made over a specified time period can be reviewed. Where this reveals any significant differences or inequalities by gender, teams, departments, fulltime and part-time staff, or any other protected characteristic, this can be investigated, and the situation amended before the scheme is fully implemented.

Keep records

Ensure that all decisions on how rewards have been made are properly documented and retained. Should your business ever be challenged in an employment tribunal, such documentation can provide valuable evidence.

The Equality Act 2010 says that when men and women are doing equal work they have the right to receive equal pay. This means that employers must provide the same pay and conditions for men and women doing work which is:

• the same or broadly similar (‘like work’), or
• has been rated as equivalent under an analytical job evaluation scheme, or
• Work which is different but of equal value in relation to the knowledge, skills, effort and responsibility involved (‘equal value’).

This applies to full-time and part-time employees. This means that any female part-time employee doing equal work to a male full-time employee, should receive the same hourly rate of pay. Providing equal pay also means your staff should know how their pay is made up and should understand, for example, what needs to be done to earn a bonus, and how the amount has been calculated.

An example of equal pay:

Although people can be employed on very different jobs, they may require similar levels of skill, responsibility, knowledge, effort, training and qualifications.

For example, the job of a cook and a plumber are very different, but both require a similar level of training and technical knowledge to carry out their respective responsibilities. If the cook was a woman and the plumber was a man, and it is found that their levels of skill, responsibility, knowledge, effort and so on are similar, they should be paid the same. If one of them had supervisory responsibilities however, that would be justification for paying that job at a higher rate.

How to check whether you are providing equal pay

As pay arrangements are often complex, features that can give rise to unlawful pay inequality are not always obvious. Although not a legal requirement, the most effective way for a business to uncover unequal pay is to carry out an equal pay review. The key elements of equal pay reviews are:

• Identifying jobs involving similar levels of skill, effort, decision-making, and knowledge (work of equal value);
• Comparing the pay of women and men doing like work, work rated as equivalent, and work of equal value;
• Identifying gaps and the reasons that the gaps exist;
• Develop an action plan to eliminating those pay gaps that cannot satisfactorily be explained on grounds other than sex.

The Equality and Human Rights Commission has produced a range of resources for employers on equal pay including an equal pay review toolkit, and series of equal pay in practice checklists.

Close the Gap

Equality and Human Rights Commission

• Equal pay audit toolkit

Acas

• Equal pay guidance
• Help for small firms: Handling pay and wages

• Download our guidance
• Download our best practice checklist