Ensuring reward is fair for all staff

Employees accept there may be disparities in reward, but resentment arises if the differences are perceived as unfair, says Jenny Keefe

As prime minister Gordon Brown is fond of pointing out, the British have the principle of fairness as part of their national identity. The trouble is that fairness, in the workplace at least, is broken.

In the past year, employees have issued a collective cry of “unfair”. Many people were appalled by the casual extravagance of senior bosses’ bonuses while pay was frozen for lower grades; there was furore over civil servants at the Ministry of Defence receiving £47 million in bonuses, while some soldiers earn less than £17,000 a year; and catering staff spoke out about organisations using tips to top up pay so that it met the national minimum wage.

The key issue here is fair reward, whether workers feel pay and benefits are just, which raises many crucial questions. Most people do not object to disparities in benefits, even large ones, as long as they are deserved, says Peter Reilly, HR research and consultancy director at independent research centre the Institute for Employment Studies. “Fairness is central to employee reaction to reward systems,” he says. “Staff can only accept differences that relate to reasonable factors: working hard, helping others, contributing more, and working longer hours.”

Best Companies to Work For

This is not just an academic debate. The Sunday Times100 Best Companies to Work For list, which celebrates the UK’s top workplaces, canvasses workers for their views. The survey’s fair deal section is about how happy employees are with pay and benefits. James Biggs, associate director at consultancy Jelf Group, says: “That section is a tough one. It can be telling for employers that miss out on the top 100. HR departments think they offer a competitive package, but staff could just as easily think it is terrible.

Employees get into a comfort zone with a good salary. Then a friend reveals they get this or that perk, and negativity sets in.” That negativity can send an organisation into crisis, damaging everything from recruitment to customer loyalty. The Chartered Institute of Personnel and Development’s (CIPD) survey Managing Reward Risks: An Integrated Approach, published in September 2009, quizzed 285 HR professionals about the risks facing reward strategies.

The eighth biggest risk was perceived injustice in reward, ahead of benefits not motivating staff, and not supporting business strategy. Paul Waters, senior benefit consultant at Hymans Robertson, says: “Reward inequality can prove a bigger issue than the absolute level of reward, even if this is low. It can destabilise the organisation.” Charles Cotton, reward adviser at the CIPD, says one of the immediate effects will be higher absence levels, which means higher sick pay costs for employers. Even worse are higher turnover levels, with potential employees deterred from joining, leading to extra recruitment and training expense Throw in weak customer service and dwindling customer loyalty, and it is not hard to see why fairness in the workplace is so important.

But concerns about fair play are nothing new. A study by researchers at Emory University in Atlanta, US, in 2003 found that the idea of justice probably originated with monkeys 40 million years ago. Researchers taught brown capuchin monkeys to exchange small stones for food. Usually, the monkeys were happy to swap their stones for cucumber. But if they saw a neighbour receive a grape, which capuchins perceive to be tastier, they had a bout of envy and stopped co-operating.

Clamp down on costs

The question is how to make sure all employees get the same tasty rewards. Perhaps the biggest challenge is how to clamp down on costs in the recession without alienating staff. The Employee Benefits Research 2009, published in May last year, found nearly three out of 10 (29%) organisations froze, or were planning to freeze, pay in the coming year, and the same proportion were reviewing performance-related bonuses. Jelf Group’s Biggs says: “If employers cut back in the recession, such as by withdrawing family members from private medical insurance (PMI), younger workers might not be worried, but others certainly will.”

So employers must consider how to win over workers, many of whom will be suffering the effects of the recession. “Employers need to tell staff about the amount of work that has been done to negotiate benefits,” says Biggs. “Employees need to know why employers are making the change and what it means for them. Most people would rather hear their employer is making sensible tweaks to support the business and that their job is safe.”

The place where the fairness debate is raging hottest is the banking sector. Many feel aggrieved senior bankers are still enjoying vast bonuses on the back of taxpayer guarantees. Sir David Walker’s review into corporate governance in financial services, published in November, recommended that banks should reveal how many staff earn more than £1 million, but not who or how much. However, this will do little to curb the tension between senior bankers and those lower down the pecking order.

Defending bonuses

The workforce would be less affronted if staff knew the logic behind bonuses, says the Institute for Employment Studies’ Reilly. “If employers remove secrecy and defend bonuses on the basis of good arguments, employees are more likely to go along with them,” he says. “If bosses cannot defend bonuses because they are arbitrary or nepotistic, then they should not pay them. There are market or motivation reasons for paying bonuses, but employees will accept these only if they are proportionate to the need.”

Of course, employers are more likely to secure employees’ goodwill by giving them a share of the spoils, says Hymans Robertson’s Waters. “If possible, structure reward so workers benefit from company performance too, with profit share, for example. This shared goal can minimise resentment.”

But there are plenty of other areas where employees can have gripes. From October 2009, restaurant bosses will no longer be allowed to count gratuities towards achieving the minimum wage. Some employers in this sector used to collect all tips and use them to fund payroll costs.

So what is a fair way to split tips? Ian Kessler, a reader in employment relations at Said Business School at Oxford University, says: “Much will depend on the pay structure in an organisation. To what extent are tips a compensation for getting lower pay than others in the organisation? [For example] Are cooks paid more than waitresses? If so, there is a good case for waitresses keeping their tips. If not, there is a case for equal distribution.”

Tips and good service

Kessler points out tips do not always reflect good service. “Tips could be kept by the individual on the rationale that performance may vary and be reflected in the tips, so the better waitress will get a higher tip and should be able to keep it,” he says. “The alternative is to pool and share tips equally, because performance is not easily controlled.

Random factors, such as difficult customers, can affect performance.” Another area where workers may object to disparities is pensions. While some lucky employees are still enjoying the advantages of defined benefit (DB) schemes, colleagues who joined later may be in defined contribution plans. This discrepancy will get worse as the number of staff excluded from closed DB schemes grows along with staff turnover. “Employees are becoming acutely aware of the disparity between DC and DB schemes,” says Biggs. “Employers cannot pay small contributions into a DC scheme and not expect it to create tension.”

One issue is that employees in DC plans can see how much more time and cash are spent on the DB scheme. Colin Mayes, senior pension adviser at consultancy Enrich, says: “Employers should, at the very least, focus more attention on the DC offering. Organisations need to put more effort into helping employees understand the DC plan, improving the way it is communicated, and putting in proper management systems.” The truly egalitarian option is to boost the salaries of employees in DC plans, but this can store up issues if the DB scheme later closes to all staff.

Legal requirement

Playing fair may soon be a legal requirement for employers. The Equality Bill, currently going through parliament, is aimed at ensuring greater equality between people of different gender, race and social class. If passed, the bill could mean that employers have to report on the average salaries of men and women in similar positions. It could also mean that if two organisations make similar bids for a government contract, the decision might rest on which one employs the most women or minority groups.

But, of course, the flipside is that rewards do not need to be equal. After all, who said employers had to be even-handed? As long as benefits are not decided by gender, race or class, there is no argument for inequality.

Fair yes, equal no, says Said Business School’s Kessler. “Rewards should not necessarily be equal. If employers can pinpoint contributions in a way accepted by all, then unequal benefits might be justifiable. But organisations need to consider the culture they are creating. However well justified, unequal benefits can foster divisiveness.”

Pay decisions

All employers would benefit from reassessing fairness in the workplace, says the CIPD’s Cotton. “In the short term, employers need to review pay decisions as part of the annual salary review, examining pay increases and bonuses. Also, examine benefits take-up and whether there is discrimination there.”

The problem is unfairness might be embedded in an organisation, so employers need to scrutinise pay structures, salary levels and how staff are promoted to higher grades. “For instance, do merit-based pay decisions, including bonuses, reflect individual employee’s contribution or line manager prejudice and bias?” says Cotton. “If there is an issue around how line managers make pay decisions, then there will be a resource requirement on providing guidelines and appropriate training.”

But what staff really want is justice and the sense they are simply getting the benefits they deserve. Jelf Group’s Biggs says: “If employers have carefully considered the package to get it right and staff are properly engaged through effective communications, they will have happier people who think life is that little bit fairer.”

Case study: Satellite staff in equal orbit

Surrey Satellite Technology’s commitment to fairness won it a place in this year’s Sunday Times’ 100 Best Companies to Work For list.

The satellite manufacturer’s employees told the judges they were paid fairly for their responsibilities, giving a 64% positive score for this question. They also said they were happy with their pay and benefits (72%).

Marie Wallis, HR director, says: “Our HR team regularly reviews the benefits offered to SSTL staff and is always keen to consider new benefits, not just from within our industry, but from top-rated employers worldwide.”

The company is admirably evenhanded. All 300 workers receive 32 days’ holiday, flexible working arrangements and a 10% employer pension contribution. Employees can opt to put their 10% employer pension contribution straight into the defined contribution scheme, take it as 10% extra pay, or put 5% in each. On top of this, the firm offers life, travel and private medical insurance.

“We are a relatively small company, but we seek to reward success by providing a mix of benefits that not only reward staff for achievement, but foster team spirit and friendly support,” says Wallis.

Case study: Ucas passes equality exam

Whether or not you thought it was fair you failed to get into your university of choice when your friends did, there is no doubt the Universities and Colleges Admissions Service’s (Ucas) 424 employees are getting a fair deal.

The organisation’s commitment to fairness is underpinned by a performance-related pay scheme, linked to individual and group targets.

Lucy Webley, Ucas’s human resources officer, explains: “We ensure that rules for merit awards are achievable, consistently applied and everyone has the opportunity to access them.”

The company’s workforce also receives plenty of non-financial perks. Employees are entitled to 30 days’ holiday, depending on grade and length of service; a voluntary benefits scheme that offers discounts on products from cars to cinema tickets; a defined contribution pension scheme; and a bikes-for-work scheme.

The Gloucestershire-based company also lays on a subsidised canteen and onsite gym.

Webley adds: “In terms of non-financial reward, fairness means offering a range of benefits, so there is something that might appeal to each individual throughout the company.”

Pre-Budget report

Last month’s pre-Budget report, delivered by Chancellor Alistair Darling on 9 December, contained several measures to tackle fairness in reward:

  • Bankers’ bonuses amounting to more than £25,000 will be subject to a oneoff 50% tax.
  • Employer pension contributions will count towards the definition of income for the higher-rate tax measure for those earning more than £150,000.
  • Public sector pension contributions will be capped to bring them more in line with those offered in the private sector.
  • All pay settlements in the public sector will be capped at 1%.