It’s a big day for an enterprise when it hires its first member of staff. But having employees brings a whole raft of challenges for a company, not least of which is how much to pay and motivate them. It’s a question that all business owners have to ask themselves at some point – when talking of staff pay, how much is enough?
The arguments for a living wage
Businesses may feel the pressure is on them at present when it comes to employee pay. It’s been a hot topic due both to a recent ruling that SMEs may have to back-date holiday pay, and because of the announcement of new living wage rates on November 3. These pay levels, which are calculated based on the cost of living in the UK, are now £9.15 an hour in London, and £7.85 elsewhere in Britain. The living wage is not obligatory, unlike the minimum wage, but it is a recommended rate to allow workers to live reasonably. In the capital, it’s set by the Greater London Authority, while Loughborough University works out the level elsewhere in the UK. And most firms appear to see the sense in it. Almost half of SMEs already renumerate their staff at or above the living wage, according to research from the Federation of Small Businesses (FSB).
The Living Wage Foundation argues that paying staff these higher rates is good for business, as well as individuals and society. It points to research by London Economics that found companies in the capital with a living wage policy experienced a number of positive side-effects, including:
- An increase in staff productivity.
- Employee retention improved, and recruitment costs fell, as did induction training expenses.
- Firms experienced less absenteeism.
- Morale, motivation, and commitment were all noticeably better.
SMEs struggling to keep up with pay changes
But some business owners argue that they have enough to worry due to minimum wage legislation. Since October, the minimum wage rates for those over 21 are £6.50 an hour, £5.13 for 18 to 20-year olds, £3.79 for the under-18s, and £2.73 for apprentices. It’s not that businesses don’t want to pay staff at these minimum levels – less than one in four SMEs has any staff on the minimum wage, meaning that almost all are paid at higher rates, the FSB says – but companies complain that increases in minimum wage rates make planning and budgeting very hard.
It’s something of a conundrum. Entrepreneurs need to pay workers at a level that’s affordable for the business, while also ensuring the company doesn’t get a reputation for low pay, which can adversely affect recruitment, retention, and productivity. But there are no hard and fast rules about how much to pay staff in different positions. For many business owners setting pay involves a degree of research, a bit of number juggling, and then having blind faith that they’re pitching themselves at the right level.
How to set staff pay
A good place to start when establishing pay rates is finding out what industry peers give staff in equivalent roles. Where you’re based in the UK is also likely to have some bearing. Look at job adverts in local newspapers, trade publications, and online to get an idea of the going rate for a given position. Then, also take into account the experience and skills of a candidate when deciding how much you might pay, as well as the specific responsibilities they‘ll have.
The Advisory, Conciliation, and Arbitration Service (ACAS) has further guidelines for small firms on setting pay fairly and effectively. These include:
- Checking once a year that your rates of pay are still competitive.
- Consider what your pay system is meant to achieve – keeping up with competitors’ pay average; increasing productivity and sales; encouraging teamwork; improving the quality of work; controlling unit labour costs.
- Talk to managers or supervisors so that they feel included in the pay decision process. Discuss the performance of individual staff members to keep track of their work, and try to reward them accordingly.
Which pay system to use
There are a variety of different methods of rewarding staff, and different systems can be used either singly or in combination. Much will depend upon what you want to achieve – straightforward reward, or giving extra incentives for reaching specific goals.
- Time-rated or basic rate systems. These pay employees a set rate per hour, day, week, month, or presented as an annual salary. This approach can allow for overtime to be paid on top of the basic rate, too. It’s probably the easiest and cheapest system to administer.
- Performance or incentive-based systems. These are more complicated, with pay being based on an employee’s personal output, or the performance of a team, or even the entire company. Other incentive-led approaches set a proportion of pay as bonuses or commissions based on a certain level of individual performance being reached. Share incentive schemes can also be used to motivate staff, either by giving them shares in the business, or allowing them to buy equity at a cut rate.
Aside from basic pay, bosses should take into account the rest of a worker’s reward package to figure out their total pay. This will include National Insurance contributions, pension provision, travel and food allowances, perks such as gym membership, and any other extra bonuses given. But, always be careful not to set pay in a way that could be deemed discriminatory, or your company could be vulnerable to an expensive tribunal claim. Employees should be paid equally for work of equal value regardless of their gender, age or race. It can be worthwhile undertaking an equal pay audit to make sure that there are no such pay gaps in your business. The Equality and Human Rights Commission has a useful step-by-step guide for SMEs on carrying out a check of this kind.
And don’t forget non-financial rewards, such as creating a good and flexible working environment, offering training and development opportunities, and giving plain, old-fashioned praise for a job well done. Aside from money, these go a long way towards making workers feel valued.
It’s good to talk
While many British people might consider talk of money vulgar, it can be wise to nurture a culture of openness in your enterprise. The Chartered Institute of Personnel and Development (CIPD) found that organisations that maintain secrecy around pay tend to have worse employee relations on the whole. Quite simply, being transparent about pay can, well, pay. Having a written payment policy, perhaps with stated pay grades, could help to achieve this. It’s also important to communicate with staff about how their pay for a given year has been calculated to avoid any confusion or resentment.
Of course, any responsible business owner will do what’s right for the company when determining how to pay staff. Wage costs are among the highest expenses for any small firm, and if it is to continue employing people it has to be profitable. But, it’s crucial to strike a balance between what’s fair for the enterprise as a whole, and what’s fair for the individual employee. Losing people because they don’t feel valued is a huge cost. However, get your pay, perk, and recognition formula right, and you should have a motivated, loyal, and genuinely happy workforce. And that will bring its own rewards to your business.
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