Types of Salary Progression
Every organisation handles salary increases in a different way. The wage advancement process must to be in line with the organization's overarching objectives, strategy, and core values. Above all, though, it must be equitable – devoid of prejudice based on age, gender, race, or other individual characteristics.
Some of the most popular methods of pay growth in the workplace are listed below.
1. Length of service
An individual progresses through a number of incremental pay points with each year of service (usually up to a maximum point after a certain number of years). This rewards the build-up of expertise in the job and helps employee retention. However, it may discriminate indirectly against women as they are more likely to take time out to meet family responsibilities.
2. Age-related increments
Seemingly outdated, there are some legal exceptions in place in respect of the UK’s National Minimum Wage and Living Wage laws. Minimum rates are lower for young workers to help them in their first steps on the employment ladder before progressing to higher levels of pay. The rates usually change every April.
3. Individual performance-related pay
Pay rises are linked to an individual employee’s performance. The aim is to encourage staff to perform to the highest level possible. Find out more about performance-related pay.
4. Team performance pay
Pay rises are linked to team performance to encourage particular types of behaviour, such as collaborative working.
5. Organisational performance
Pay rises are linked to organisational performance (for instance, by taking divisional sales levels into account).
6. Competence pay
Pay rises are based on an assessment of employee competencies in various ways, focusing on the worker’s input to the job, rather than achievement, for example customer service or communication skills. Find out more about competence and competency frameworks.
7. Skills-based pay
Pay rises are based on acquiring additional skills or specific qualifications to encourage employees to undertake appropriate study or training.
8. Market rates
Pay rises are pitched to keep pace with rates for similar jobs or regional pay levels in the external labour market. See more on market pricing.
9. Inflation-linked pay rises
In simple pay structures, a cost-of-living increase may be applied each year. Such arrangements don’t provide any scope for ‘real’ pay progression.
But as employers seek to link pay with performance, inflation-based rises are rarer and largely confined to unionised environments and/or relatively low-skilled or homogeneous occupational groups.
Where pay arrangements are more complex, the structure itself may be adjusted each year. This is often an inflation-based increase to some pay levels or grade ranges (sometimes excluding certain levels or minimum rates, for example to freeze pay for poor performers), rather than giving everyone within that structure an identical pay rise. For instance, the pay increase may be linked to performance and position in the salary range with those below the median getting more than those above it.
Some employers award a cost-of-living increase and a separate award using one or more of the methods above, or the two increases may be combined in determining a single pay award (particularly popular at times of low inflation).
Controlling Salary Progression
While modern pay structures aim to allow rewarding higher levels of performance or contribution, employers still need to control payroll costs.
With service-related progression, control is built in as everyone can only achieve one increment each year, up to a set level. But, because it effectively guarantees progression to the pay scale maximum, employers could still face high wage bills, for example, when employee turnover is low and staff become clustered at the top of each pay grade.
Controlling pay progression is particularly important in flexible pay structures, such as broadbanding. A variety of techniques may be used, including:
- Target (or reference) points: Under individual performance pay arrangements, it’s common for ‘satisfactory’ performers to progress to a target point in their pay range. Once at that point, the rate of pay progression reduces.
- Zones: Involves dividing each pay band into, say, three zones and specifying that individuals can only progress to the next zone for some exceptional reason - particularly useful for employers with a broadband system.
- Cash bonuses: A reference point could be set in the pay range beyond which cash bonuses might be paid rather than consolidated pay increases.
