Low inflation creates pay management headache

REWARD MANAGEMENT

Subdued inflation is creating a pay management headache for many employers, according to consultants Watson Wyatt.

As the low inflation environment continues, employers are looking to find innovative ways of managing employee pay rises in conditions where absolute salary awards are small and the ability of employers to realign pay scales is severely limited.

"Employers are facing a number of difficult issues," said Carole Hathaway, a partner at Watson Wyatt. "One of the most significant is how they justify the allocation of HR, line management and employee time and emotional energy in assessing individual performance in order to deliver relatively small absolute increases in pay and insignificant differences in pay increase between satisfactory and star performers."

How to manage pay in a low inflation environment

According to Watson Wyatt, employers are working on a range of alternative approaches, of which five may prove successful in tackling the issues created by low inflation and limited budgets:

Undifferentiated pay increases -- where the same basic increase is paid across-the-board for all employees but total cash compensation is differentiated through short-term incentive plans.
Changing band-width -- moving away from the traditional 80% to 120% pay range within a band to narrower band widths for employees who have been in-post for more than a certain amount of time.
Competency-based pay progression -- where pay rises are linked to the acquisition and demonstration of competencies rather than performance.
Job families -- where roles are clustered into broad groups and employers can make pay decisions that reflect the strategic importance of these job families.
Market pricing -- where individual pay is determined solely by reference to the external competitive market.

"Continuing with the old ways of managing pay is no longer effective," said Carole Hathaway. "However, there is no universal panacea. Each employer must carefully assess its specific people strategy and capabilities to determine which new approach will most successfully align with its HR and total reward policies and processes to deliver the business strategy. The starting point for conducting this review has to be the need to maximise the return from the largest single element of investment in employees and for clarity over the part that base pay plays in a total reward package."

Want to know more?

Watson Wyatt is a global consulting firm focusing on human capital and financial management. It specialises in employee benefits, human capital strategies, and insurance and financial services. Watson Wyatt has more than 6,000 associates in 88 offices around the world. To find out more visit www.watsonwyatt.com

Posted 1 September 2004