Tag Archives: Merit Pay

Pay Actions: An Introduction for HR Professionals

A few weeks ago, I wrote an article about compensation practices that included a brief look at pay approaches including single-rate pay, step-based pay, and a slew of pay differentials. Taking it a step further, this article is about pay actions and explains the types, why they occur, and how they’re communicated to employees.

WorldatWork defines a pay action as the movement (e.g., an increase or decrease) of an employee’s base pay due to either external or internal pressures, either company or employee generated. 

Company generated pay actions are usually based on external or internal influences. For example, external influences could be market adjustments or reclassification of a position and internal influences could be a promotion or demotion. An employee generated pay action can be the result of an employee’s request for a demotion or, perhaps, a shift change.

Pay Increase

Arguably, the majority of pay actions are increases in pay, which can be administered in several ways and in several forms including lump sum and periodic increases.

A lump-sum increase occurs when an employee’s increase in pay is awarded at one-time as a lump sum rather than spread out over regular pay periods as an increase to the hourly rate or, if exempt, the annual salary. One of the advantages of offering lump-sum payments over pay rate increases is that they don’t compound over time. Also, many employees appreciate receiving a larger amount at one time vs. small increases spread out over the year. And, lastly, they’re easier for employers to administer.

On the down side for employers, some employees get the lump-sum at the beginning of the year and leave the company, taking a years worth of pay increases with them rather than receiving the increase an hour or week at a time throughout the year.

A periodic increase is similar to a lump-sum increase in that the employee receives a part of the increase all at once, with the remainder of that year’s increase at a later date, perhaps mid-year. The advantage for employers is that they incur lower cost at the beginning of the year. The employee, however, has to wait for the rest of the pay increase.

Job Change

Most job changes are the result of either a promotion or demotion and can be organizational or growth related.

Promotions are usually due to a change in the employee’s duties. For example, moving from a supervisor level to a manager level position. A promotion can also be awarded in recognition of an employee’s professional development.  

Demotions are often the result of poor employee performance, an organization restructure, or at the employee’s request. Demotions do not always result in a pay reduction, which is tied to the reason for the demotion. Many organizational changes carry with them no loss of pay to employees. Poor performance often results in a zero increase or a pay freeze until performance improves rather than a reduction in pay. An employee’s request to move to a lower level position, however, usually comes with a pay cut.

General Increase and Cost of Living Adjustment (COLA)

A general increase, also known as an across-the-board increase, is not tied to performance. A COLA is given to bring employees’ pay in line with the cost of living to maintain their purchasing power. Both a general increase and a COLA provide all eligible employees with a pay increase that is either a flat rate or a percentage of salary, with everyone receiving the same dollar amount or percent of increase.

Some employers use the Consumer Price Index (CPI) as a guide for general increases, while others take movement in the employment market into consideration. Public sector and employers with unionized employees are more apt to offer general increases instead of performance based increases. Increases not tied to performance, however, can generate a sense of entitlement among employees and fail to address pay inequities.

Reclassification

A pay action tied to reclassification occurs when a job is reassigned to a lower or higher level within an organization’s job grade structure or job hierarchy, usually as a result of changes in the job’s requirements, prompting a reevaluation of the job’s worth. It can also be due to a significant change in the external market value of the job.

A change in job class does not always result in a change in pay. Reclassification of a job to a higher grade or level often comes with an increase in pay to the individual(s) in that job. That pay increase, however, may not happen immediately. It may occur at a later date (e.g., at the next performance review) or it may be awarded incrementally until the incumbent reaches the appropriate level. Reclassification of a job to a lower level or grade usually creates red circle rate—a pay freeze until the job’s pay range catches up with the pay rate of the individual in that position.

Market Adjustment

A market adjustment is a pay action made to bring a job’s pay range in line with comparable positions in the job market. It can be made at the individual job level or across multiple jobs within the organization. Many employers conduct annual or bi-annual market reviews to ensure their pay rates are competitive.

Market adjustments are often due to a job’s reclassification or a change in the organization’s pay philosophy, for example a move from lagging the market to paying at or leading the market.

Communicating Pay Actions

Providing employees with the information they need regarding changes in their pay is crucial to administering an effective pay system—it can make or break a pay program. Keeping employees in the loop regarding changes in their pay enhances job satisfaction and increases employees’ sense of their own value to the organization. Effective communication about pay also decreases employees’ anxiety about their jobs and can even improve their focus on the tasks at hand.

Communication about pay actions should clarify the employer’s expectations and provide employees with the pay program’s requirements. Having adequate information about how and why their pay is changing helps employees determine whether to remain with the organization so it’s important to make sure communication is honest and understandable to employees at every level. It is just as important to make sure the management team has an accurate understanding of how to implement pay actions.

Keep communication about pay actions concise and explain them from employees’ perspective, making sure they have the information they need to understand why their pay is changing and how the change is processed. They need to know when the change is effective, if it is permanent or temporary, and whether the change, if it’s an increase in pay, will be distributed as a lump-sum amount, a periodic amount, or will bump up their ongoing pay rate.

When the pay action has a negative impact on an employee, the sooner it is communicated the better. It’s important to give the employee time to adapt to the news and, in some cases, to vent their concern. Be prepared to answer questions about why the pay action is being taken. If there is a business reason for the pay action, for example pay freeze or reduction vs. employee layoffs, be open about why the change is happening. 

Communication regarding pay actions should be face-to-face, preferably between supervisors and their individual employees. As an alternative, however, the next level manager or the HR manager may be the best option for communicating a pay change to the employee. If the pay action is being implemented company-wide, announcement of the change should be made by senior management followed by one-on-one meetings between employees and their supervisor or manager.

NOTE: Information in this article is based on the WorldatWork Certified Compensation Professional (CCP) study guide: Base Pay Administration and Pay for Performance. For information on the CCP program click here.

 

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