Employees who have been singled out as “high performers” are being awarded pay raises that are, on average, 67% higher than their peers, according to research in the UK by HR consultancy Towers Watson.
The practice of varying the pay awards of employees at the same level, known as pay differentiation, was carried out by 93% of the 124 UK organisations surveyed. Of those, 28% said they differentiated more this year than last, while only 11% said they differentiated less.
The research found that individual performance was the major reason for pay differentiation. The second most important factor was market alignment (cited by 72% of respondents) followed by internal consistency (57%), key skills (44%) and potential (39%).
Low budget, high differentiation
The average budget for base pay increases was 3% of salary costs.
Organisations with lower budgets (less than 2.5%) differentiate even further, offering high performers pay increases twice as large as colleagues who demonstrated an average performance. Companies with pay budgets of 3% or more singled out high performers less, offering them 67% higher rises than the company average.
“It is very encouraging to see organisations continuing to focus on rewarding high performance and interesting to see that this tendency becomes increasingly pronounced the more a company’s budget is squeezed,” Chris Charman, a director of Towers Watson’s UK Rewards practice, said in a news release.
“However, we were surprised to see that when budgets were more generous, the focus shifted to market alignment, rather than on to high-skill or high-potential employees.”
The study also found that:
- Line managers tend to drive the pay review process, typically within clear parameters set out by HR, but half the companies surveyed thought poor line-management skills had been a barrier to differentiation – 23% cited a lack of tools to identify talent.
- Bonuses are differentiated by most organisations, with 30% claiming to differentiate bonuses more than base pay.
- Ten per cent of companies actively ring-fence a separate budget for differentiation, meaning that, in most instances, above-average pay increases for one group need to be offset by below-average increases elsewhere.
Charman says clear communication on pay differentiation policies can be a valuable motivator.
“We know that clear communication around rewards and how reward programmes work increases understanding and the value placed on them,” he said. “It is common sense that employees need to know what it takes to get high rewards; after all, that’s the purpose of a performance pay system.”