Challenges for Market Based Pay Models in a Period of High Inflation
As many employers will appreciate, the essence of a market-based pay model will generally link wages for the relevant categories in scope in Company A to the average median wage that pertains in comparable Companies B, C, and D. However, the operations of these market based pay models have faced some challenges in the current period of high inflation.
The market median is a mid-point in a series of pay decisions made by other companies, about other people, in similar roles. The market median, along with the upper and lower quartile, provide a useful indication of the competitive range of salaries. Typically once set with bands being determined, these will be subject to a periodic review mechanism e.g. every three years.
An effective reward strategy must not only help to attract, retain and motivate staff, whilst enabling pay progression, but it must also underpin and support the preferred engagement model operated by the employer.
It is good practice for an employer to articulate it’s policy towards pay determination, along with the review mechanism and procedures to give effect to this being set out. Apart from any periodic review of salary bands, typically, as part of the model a market review for application in a current year, will normally draw on market pay data that may be up to a year in arrears. This poses significant challenges for employers in a period of high inflation such as over 2022 and 2023, when deciding on pay awards where the market pay data fails to reflect the impact of current year inflation on pay trends.
Faced with discontent from staff an employer can argue there is no justification for any base pay revisions ahead of the next market review under its reward model as that review will incorporate data movement over 2022 and 2023 for application e.g., by way of a band adjustment, but this will be unlikely to convince staff or to settle the issue.
Further complications will often arise where pay increases are also limited for those that are deemed to be ‘above market’. By ‘limited’, this refers to lower than market increases and/or lump sum payments. This approach is saying to these staff that they will not get any further pay increases until their colleagues catch up with them.
1. Comparisons Should be Fair to Ensure Equity and Greater Transparency
As part of ensuring acceptance of and support for the reward model, then it must encompass and address any actual and perceived issues of external equity. This should ensure that fair comparisons drawn include a number of similar organisations, sister sites in Ireland (if applicable), and relevant other multinational employers in the sector, region and nationally.
Too often, the lack of data transparency can also provide grounds to attack market-based pay models. It may be argued that the comparator(s) is not an objective set of figures, is skewed or is an unverifiable dataset or ‘black box’ which is produced by reward and benefit consultancies. In the absence of transparency, it is easy for detractors to encourage a lack of belief in the accuracy of the data.
2. Annual Pay Increases
Annual Pay adjustments should be in line with the market and for those organisations who practice a direct engagement model this should include as a ‘de-minimus’ what is happening in the unionised private sector. The pay budget available for distribution should allow line managers to apply pay increases that are at least broadly in line with market increases for people that have delivered acceptable performance levels over the year.
In some market-based models, and subject to the design principles of the model, to cope with the impact of heightened inflation, the employer may decide to award a general adjustment along with off scale payments, other benefit adjustments and/or an increase in a maximum bonus applicable and agreed percentage for a refresh of the bands.
It may still of course be necessary to withhold a pay increase for a person that is on a performance improvement plan (PIP) or has received a formal warning regarding their performance.
More employers are interested in deploying a fully differentiated pay model to include front line staff. However, applying and sustaining such a differentiated pay model is a major HR challenge and should not be underestimated. In our experience, where poorly managed, designed and implemented in a non-union environment, it can create an impetus for employees to consider joining a Union or to become more receptive to doing so.
3. Interim Pay Options
To deal with employee concerns, amidst the current cost of living crisis, employers have often had to conduct a significant engagement exercise to moderate pay outcome expectations. This may give rise to interim solutions, where other outcomes could have unacceptable implications for operation and commitments under the established reward model. This may give rise to adjustments on an exceptional and once off basis by way of a flat lump sum or ‘off scale’ type payment amount to be without precedent for the future but in a manner which must protect the Reward Model. It would also need to be considered whether this would be consolidated/non-consolidated and if it is to be pensionable/non pensionable? This could be positioned as an exceptional measure for the relevant period only.
As a variation, it may be necessary consider a ‘review clause’. This would be framed and stated to be without prior commitment on the part of the employer as to any outcome but would simply commit to discussions/consultations by a certain date, in the event of a certain average level of inflation persisting over an agreed period.
The employer may also wish to consider, given the exceptional outcome being applied for a particular year, if any adjustments in the period are to be netted off against any increases as may arise under the Reward Model for application in say a following year or the next planned year under the Market Review.
It may be necessary to stipulate as part of the communication of any interim outcome that:
The outcome is an exception, and the next market review will still take place in (year).
The outcome shall not give rise to any other new or consequential matter being taken or processed in the interim.
In the operation of their reward model, including when engaging with staff on the outcomes from market based pay reviews, organisations must also ensure that communications and feedback processes are effective to ensure there is a full understanding of both the concerns of staff and the rationale for any proposed wage increases by management. This is ever more challenging but important amidst the current period of heightened inflation, a tight labour market and the capacity of the employer to attract and retain staff.
If you would like to talk to us about any of the above issues, please get in touch with us or any of our Partners.
Brendan McGinty | Managing Partner
‘Strategic Employment Relations’
M: +353 (0) 87 2433038 +353 (0) 1 2936748
Disclaimer: The information in this article is for general guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.