Essential guide to remuneration

Get your remuneration packages right and you will attract reliable employees with the skills your business needs. Get them wrong and you will be unable to recruit or retain these people.

Since the remuneration package is the most visible part of any job offer, you must pitch it right to interest the right people. But even that can be easy, compared with fine-tuning the rewards to keep good people with you.

The market rate

More or less?

Basic pay

Bonuses and commission

Shares and options

Benefits

Non-financial extras

Pay reviews

1. The market rate

Establish the market rate, as a starting point.

Paying the market rate involves careful job evaluation (so you know what's being compared) and external research (word-of-mouth, advertisements, published surveys).

The skills needed may be widely available

• Compare rates at local employment agencies and Jobcentre Plus.

The job may demand specialised skills

• National newspapers focus on specific skills areas on different days of the week.
• Refer to online salary surveys and guidance from recruitment agencies and other websites.

You may require highly specialised skills

• Going rates are usually easy to check in professional journals.
• Job advertisements in the specialist press often inform candidates' expectations.
• It may be worth commissioning a bespoke salary survey, if it helps you get the right person for a specialised role.

2. More or less?

Whatever your research tells you about the market rate, you will probably want to adjust your offer to reflect the job and circumstances.

Are you looking for a higher-than-average calibre of employee?

• Do you need trained people or are you prepared to offer training?

What are the particular problems you face in recruiting the right people?

• Are there geographical factors (eg travel to central London, or a remote location)?
• Are the skills you need wanted urgently or in especially short supply?

Must you offer relocation allowances to attract good people from outside the area?

3. Basic pay

The most basic level of pay is set by law

• The national living wage (NLW) is £11.44 per hour for employees aged 21 and over.
• The national minimum wage (NMW) for those aged 18 to 20 is £8.60 and £6.40 for workers aged 16 and 17.
• Apprentices under the age of 19 or in the first year of their apprenticeship are entitled to a minimum hourly rate of £6.40. After that, you must pay them the rate applicable to their age.
• Above that, you can decide what and how you pay your employees. Some businesses have signed up to the Real Living Wage which is higher than the NLW at £12.60 per hour (or £13.85 an hour for workers in London).

Will you pay by time or performance?

• The choice between wages and salaries is often a matter of tradition or expectations. Weekly wages suit companies with a fixed working day, short working hours or irregular patterns of work.
• Hourly pay may lead to high overtime costs if demand is irregular.
• Annual hours contracts can offer flexibility for both you and your employees, while avoiding premium payments for overtime.
• Piece rates link pay directly to productivity.
• Commission can range from the icing on the cake to the main element in the pay packet.

Your pay structure may be simple, but there should be some logic to it

• It should be clear and fair. The aim is to create a situation where employees can feel their pay is reasonable, compared with each other.
• Part-timers and full-timers should be able to see how their pay is related.
• You must meet your legal obligations (eg to give equal pay for work of equal value). Do not discriminate.
• Record all decisions and make sure they are supported by a robust process.
• Consider undertaking an equal pay review to identify any problematic areas and potential corrective measures.

Decide what part overtime is going to play

• How are you going to value it?

Be aware of tax and National Insurance (NI) thresholds

• Do not pay people amounts that will put them just above a threshold.
• It may be possible to use tax-efficient shares and options, rather than raising pay.
• Paying out cash as share dividends, rather than income, is still a tax-efficient way of remunerating shareholders - usually directors, investors and senior employees.
• There is a tax-free dividend allowance of £500. Income over the allowance is taxed at 8.75%, 33.75% or 39.35% respectively for basic, higher and additional tax rate payers.
• If you and your partner are employed in the same business, make sure you have good evidence of what each does. HM Revenue & Customs (HMRC) has targeted spouses receiving a disproportionate share of dividends.
• Dividends attract income tax, but no NI.

4. Bonuses and commission

Bonuses and commission payments need to be seen by employees as extras, or there will be no incentive effect.

Incentives work, if the targets are right

• Incentive pay is only effective when it relates to specific achievements.
• It needs to be closely matched to the business and to the people involved.
• Incentives based on competition backfire if the same people always win.

You need to decide whose performance an incentive scheme should be based on

• Incentives may be linked to performance at the company, team or individual level. The right linkage will depend on factors such as how much one person or group's success depends on the efforts of others.
• Research shows many performance-related pay schemes give disappointing results, though this may often be due to poor targeting and unrealistic expectations.
• Profit-related pay is a type of performance-related pay that automatically reflects a whole company's achievements. Even without tax breaks, profit-related pay (paid to everyone at, say, 10% of salary) can be a powerful, non-divisive incentive.

Performance bonuses need to be large enough to be significant to the individual

• You usually need to make bonuses between 10 and 25% of salary to motivate employees effectively.

Other bonuses can be used to focus attention on areas that affect business success

• For example, a weekly productivity bonus or a 13th month's pay to boost staff retention.

Commission is the usual basis of pay for sales operations

• But low-basic, high-commission pay structures may not be the best way to attract, motivate and retain people.

5. Shares and options

Share schemes and share option plans allow you to link long-term incentives to long-term goals. They give employees a stake in the company's growth.

HMRC-approved employee share schemes can offer tax advantages

• Shares and options granted under HMRC-approved employee share schemes are free of income tax and NI, if they are held for the specified period.
• The business may be able to offset the costs of setting up and funding such schemes against corporation tax.
• Approved schemes include Share Incentive Plans (formerly All-Employee Share Ownership Plans), Save as You Earn schemes and Enterprise Management Incentive schemes.

Unapproved schemes bring fewer tax breaks, but can be set up on a larger scale

• It is advisable to seek professional advice on the tax treatment of any share scheme you offer or are considering.

Smaller companies can be reluctant to set up a share scheme

• The original owners of the company may be concerned about diluting their equity.
• You also have to negotiate a market value of the shares with HMRC.

6. Benefits

Pensions are usually the first benefit provided for employees

• All employers are being required to automatically enrol in and contribute towards a workplace pension for all eligible employees who are not already in a workplace pension scheme.
• Contributions are treated favourably, with no tax or NI to pay on HMRC-approved schemes.

Cars and car parking are still attractive to employees

• Though the tax advantages have been reduced, most employees still accept a car if offered.
• A parking space at or near the place of work can be a valuable tax-free benefit.

There is no tax to pay on a mobile phone provided by an employer

• This is restricted to one phone per employee. Additional phones will be liable to tax.
• If employees have part of their home phone bills reimbursed, they will have to pay tax. It may be better to provide mobiles.

Childcare vouchers can be provided tax free

• There is a limit of £55 per week per employee. (The limit is lower for higher earners.)

Accommodation can be tax free for those who must live in a certain place to do the job

• For example, caretakers and oil rig crews.
• Elsewhere, it is taxed as a benefit. But even with the tax charge, potential recruits may find the offer of accommodation attractive.

There are several low-cost, tax-advantaged benefits that employees value

• Staff discounts (on your products) are not taxed and can be an attractive perk (eg in retailing, transport and travel).
• Personal loans of up to £10,000 are free from tax and NI. Offering season ticket loans or interest-free loans can build loyalty.
• Non-cash long-service awards (up to £50 equivalent value per year of service) do not attract tax, providing the employee has worked for the business for 20 years.
• Annual parties (or similar celebrations) paid for by the employer are tax free, up to a cost of £150 a head.
• Bicycles provided by an employer to employees are not liable to tax or NI.

Analyse the full costs and benefits of all the perks you offer

• NI is payable on most taxable benefits in kind. If there is tax on a benefit, the employer usually has to pay NI at 13.8%.

7. Non-financial extras

Money is not the only thing people want from their jobs - and not the only motivator.

Use holidays creatively, as part of the employment package

• Agreeing to extra unpaid leave may provide a trade-off if you cannot afford full market rates for specialist skills.

Flexitime or homeworking can be a powerful attraction for potential recruits

Job content and fulfilment are what many people want most from their work

• Most employees want to be extended ('stretched'), but not stressed.
• Use appraisals to fine-tune the role and get the best out of the employee.
• The feeling of doing something worthwhile, for a worthwhile organisation, is a strong motivator for many people.

Training is particularly attractive to young, ambitious employees

• Experience in a new role enhances a person's CV and earning potential.
• Training makes the person more valuable to you, but also to any other employer.

8. Pay reviews

Pay reviews need to be regular and should be kept separate from performance reviews

• Aim for a steady increase in real earnings, over the months and years, for employees whose performance is satisfactory.
• Make a clear distinction between promotions and increased pay for the job.
• Build in a performance-related element for every employee, including juniors.

Ask people what their needs are

• A dissatisfied employee will not always be won over by a pay rise, even a large one.

You must pay equal pay for work of equal value

• This applies to bonuses and commission as well as basic rates of pay.
• Employment tribunals are required to order a pay audit if an employer is found to have breached equal pay rules.

If there are workplace trade unions, involve them in pay structure reviews

Expert quotes

"Recruiting people is relatively easy. The hard part is judging the whole remuneration package so that you are able to keep the good people with the skills and experience the company needs." - Lesley Stalker, Robert James Partnership

"If you can't afford to incentivise your key staff by paying them in cash bonuses, then using employee share schemes - by awarding them shares or share options, subject to performance - may be your best response to potential staff retention problems." - Fred Hackworth, Employee Share Ownership Centre

"Overwhelmingly, exit interviews show that most employees only join another company 'for more money' if they are unhappy in their existing job in the first place." - Bob Havard, Havard Consulting