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.
This briefing covers:
- Deciding how much to pay.
- Complying with statutory obligations on minimum wage.
- Structuring pay and benefit packages.
- Using non-financial rewards.
- Handling pay reviews.
1 The market rate
Establish the market rate, as a starting point.
1.1 The skills needed may be widely available.
- Compare rates at local employment agencies and Jobcentre Plus.
1.2 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.
1.3 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.
2.1 Are you looking for a higher-than-average calibre of employee?
- Do you need trained people or are you prepared to offer training?
2.2 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?
2.3 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, with the national minimum wage (NMW) and national living wage (NLW). The NLW, introduced in April 2016, is £7.20 per hour for employees aged 25 and over. The NMW is currently £6.70 an hour for employees aged 21 to 25, £5.30 for those aged 18 to 20 and £3.87 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 £3.30. Above that, you can decide what and how you pay your employees.
3.1 Will you pay by time or performance? There are several possible approaches.
3.2 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.
3.3 Decide what part overtime is going to play - and how you are going to value it.
3.4 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 incentives, rather than raising pay (see 5).
3.5 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 new, tax-free dividend allowance of £5,000. Income over the allowance is now taxed at 7.5%, 32.5% or 38.1% 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.
4.1 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.
4.2 To get the desired results, you need to decide whose performance an incentive scheme should be based on.
4.3 Performance bonuses need to be large enough to be significant to the individual.
- You will usually need to make bonuses of between 10 and 20% of salary to motivate employees effectively.
4.4 Other bonuses can be used to focus attention on areas that affect the success of your business (eg a weekly productivity bonus or a 13th month’s pay to boost staff retention).
4.5 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 Using 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.
5.1 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.
- You 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), Enterprise Management Incentive schemes and Seed Enterprise Investment Schemes.
5.2 Shares held by employees in the companies they work may count as business assets for capital gains tax (CGT) purposes.
- Employees who have adopted employee shareholder or employee owner status will be exempt from CGT on gains on shares worth up to £50,000 in return for forgoing some employment rights.
5.3 Unapproved schemes bring fewer tax breaks, but can be set up on a larger scale.
5.4 One brake on the progress of share plans in smaller companies is often the original owners’ concern about diluting their equity.
- You also have to negotiate a market value of the shares with HMRC.
It is advisable to seek professional advice on the tax treatment of any share scheme you offer or are considering.
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% (2016/17).
6.1 Pensions are usually the first benefit provided for employees. Contributions are treated favourably, with no tax or NI to pay on HMRC-approved schemes.
All employers will be required to automatically enrol and contribute towards a workplace pension for all eligible employees who are not already in a workplace pension scheme (being phased in between October 2012 and February 2018).
6.2 Cars and car parking are still attractive to employees.
- Though the tax advantages of a company car 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.
6.3 There is no tax to pay on mobile phones provided by an employer (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.
6.4 Childcare vouchers up to £55 per week per employee can be provided tax free.
6.5 Living accommodation can be tax free for those who have to live in a certain place to do the job (eg 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.
6.6 There are several benefits that cost little to provide, are valued highly by employees and get favourable tax treatment.
- 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.
- Long-service awards (up to £50 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.
7 Non-financial extras
Money is not the only thing people want from their jobs - and not the only motivator.
7.1 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.
7.2 Flexitime or homeworking can be a powerful attraction for potential recruits.
7.3 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.
7.4 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.
One for all
Membership of healthcare schemes is attractive. It is treated as a taxable benefit-in-kind. The employee pays tax on it, and the employer must declare it on Form P11D.
- Employers have to pay NI too (see 6).
Insurance cover helps employees guarantee their families some security.
- Life assurance and death-in-service benefits are normally linked to pension schemes and are not usually liable to tax.
- Premiums paid for critical illness cover and income protection insurance are not taxed. Instead, the money paid out by such policies is taxed as income.
Benefits like this can be bought much more cheaply through group schemes than by individual employees paying high premiums out of taxed income.
- Group schemes offer acceptance, up to certain limits, without medical questions.
8 Pay reviews
Pay reviews need to be regular and should be kept separate from performance reviews.
8.1 Aim for a steady increase in real earnings, over the months and years, for employees whose performance is satisfactory.
8.2 Build in a performance-related element for every employee, including juniors.
8.3 Ask people what their needs are.
- A dissatisfied employee will not always be won over by a pay rise, even a large one.
8.4 Make a clear distinction between promotion and increases in pay for the job.
8.5 If there are workplace trade unions, involve them in pay structure reviews.
8.6 You must pay equal pay for work of equal value; this applies to bonuses and commissions as well as basic rates of pay.