5 Mar 2021
Reward: an introduction
Introduces the basics of reward, which includes pay and benefits, and outlines the UK
legal position
Introduction
Pay and benefits are important in attracting, retaining and engaging employees. A range
of options is available to reward people and recognise their contribution, each with their
own opportunities and risks. The most effective reward packages support the business
strategy, staff wants, and the organisation’s purpose, culture and performance, in a fair
and consistent way.
This factsheet explores the purpose of reward and how employee responses may vary
depending on different contexts. It introduces pay structures and levels, considerations
surrounding pay awards and factors affecting pay progression. It also describes variable
pay – from cash bonuses to incentives – as well as outlining some UK legal issues. Finally,
it looks at the role of employee benefits, non-financial rewards and total reward.
Explore our viewpoint on low pay and financial wellbeing and executive pay in more detail,
along with actions for government and recommendations for employers.
What is reward?
The term ‘reward’ generally covers all financial provisions made to employees, including
cash pay, and the wider benefits package (such as pensions, paid leave). It can also include
wider provisions for employees, with the term ‘total reward’ sometimes used to
encompass non-pay benefits.
Pay may be divided into two categories:
Base (or fixed) pay is a guaranteed cash wage or salary paid to employees for doing
their work for a contracted time period, such as a 37-hour week. This can include
location allowances and other associated guaranteed payments.
Variable pay is not guaranteed. It can include bonus, incentives and overtime
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payments.
Pay definitions vary. For example, some employers might treat location allowances as part
of base pay, while others may see it as variable.
Other terms may also be used. ‘Compensation’ for example is usually taken to mean just
financial rewards (fixed and variable pay) while ‘remuneration’ might be used
interchangeably with ‘reward’ to mean the wider benefits package, such as the value of
employer pension contributions.
Reward is an area of specialist knowledge in our Profession Map.
Reward in the time of coronavirus
During the COVID-19 pandemic and the economic restrictions, pay and benefit
professionals should consider whether their organisation’s reward approach is fit for
purpose by exploring questions such as:
Is it paying its essential and key workers a liveable wage?
Are the organisations in its supply chain paying their workers enough?
How is it ensuring that certain groups of workers, such as female, black or disabled
staff, aren’t being affected disproportionately?
How might the measures used to assess employee performance and bonus,
incentives, and pay awards need to adapt?
Do its employee absence polices, such as for leave, bereavement, self-isolation or
illness, need to change?
How can it improve employee productivity to reduce its cost base?
What’s happening to workplace financial wellbeing?
Should it invest in the HR technology needed to investigate whether its people are
paid fairly?
What can it do to protect staff from financial scams, such as around pensions?
If it has to freeze employee pay, can it offer something in return?
Does it need to change how it communicates with employees about reward?
The answers to these and other questions will help ensure the total reward budget is
being spent wisely. Our 2020 Reward management survey explores the impact that
COVID-19 is having on pay and benefits.
The Coronavirus Job Retention Scheme (also known as the furlough scheme) and the
Coronavirus Large Business Interruption Loan Scheme also have implications for pay and
benefits.
Listen to our Reward and benefits during and after COVID-19 webinar. There’s more on
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what employers should be doing in our Responding to the coronavirus hub.
Managing reward
The main reason for offering pay and benefits is to influence behaviour so employees
want to join and stay with an employer and to do their best in the job. Traditionally,
salaries were used to attract people to an organisation, benefits helped retain them, and
bonus and incentive schemes motivated them in their work. However, the thinking about
which parts of reward are best suited for recruitment, retention and motivation has
changed. Listen to our podcast on the changing landscape of reward.
Individuals are attracted, retained and engaged by a whole range of financial and nonfinancial rewards, which can change over time depending on personal circumstances. In
some situations, individuals may not consider the financial elements of a package
particularly important. For instance, people at the beginning of their career may be more
interested in gaining access to training and career development. Similarly, individuals may
be willing to work for lower pay rates (or even volunteer) if they have a strong attachment
to an organisation’s mission.
Employers should find out what attracts, keeps and inspires their current and future
people, and explore how best they can meet these needs – as well as meeting the
requirements of the business within the appropriate legal and regulatory environment.
When creating a reward package, it’s also important that organisations integrate the
various elements so that they support, rather than contradict, one another.
Behavioural science has offered up useful insights about how individuals may respond to
various aspects of reward. Employers should use the lessons from behavioural science
when designing, implementing and communicating its reward package. Find out more in
our report Show me the money! The behavioural science of reward. Our Employee
engagement – definitions, measures and outcomes report also shows the impact reward
and recognition practices can have on the level of commitment employees feel to their
organisations.
Because there are various elements to reward, it’s important to think about the
appropriate mix of base to variable pay, fixed to flexible benefits, financial and nonfinancial rewards to meet the needs of both the organisation and its employees
When making decisions about how to reward and recognise contribution, it’s important
to recognise the people risks involved. Employers operating overseas should also
consider whether to set reward centrally or allow each region or subsidiary develop its
own approach.
Organisations should establish a reward strategy that clearly articulates the aims of the
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various reward elements and how they are integrated. A reward strategy reflects the
organisation’s purpose and values, so it’s important that appropriate communications
explain to staff what behaviours and performances the organisation is rewarding, how,
why and when. This may include employee education so that staff understand the
benefits on offer, especially if the level of coverage varies. It’s important to think about the
implications for other parts of HR, such as the training and development line managers
might need so they can communicate effectively about the rewards on offer. Employers
also need to have measures in place to assess the impact of their reward strategy on
people and performance.
Determining base pay and total earnings
Pay structures
Pay structures provide a framework for valuing jobs and understanding how they relate
to one another within the organisation and to the external labour market. Our Reward
management surveys show that a wide range of pay structures exist linked to varying
organisational needs and objectives.
Pay structures may also need to allow for certain additional elements other than basic
pay rates, for example location allowances. Find out more in our pay structures factsheet.
Pay levels
There are various approaches to setting pay levels or ranges for jobs. For example, job
evaluation is an important tool for setting pay rates among public sector employers,
whereas market pricing tends to be more influential in the private sector. Where market
rates are used, employers need to determine where to pitch in-house rates (for example,
at the median or upper quartile). See more in our factsheet on job evaluation and market
pricing.
Pay awards
Key factors when setting the overall pay review budget for annual pay increases – which
often includes performance-based pay rises as well as general pay structure movement
(often known as the annual pay award or cost of living uplift) – include:
ability to pay
inflation
market rate changes.
There are variations by sector. For instance, in the public sector the government’s pay
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policy is key, sometimes together with union pressure, whereas the latter is rarely an
issue for many private sector companies. Our report Megatrends: have we seen the end
of pay rise? looked at UK pay and inflation trends, while our quarterly Labour Market
Outlook reports look at pay forecasts for the coming year.
Pay progression
Individual performance, competency and skills are commonly used factors for moving
individuals along salary bands or ranges. A hybrid approach that bases progression on
more than one factor is typical. It might involve assessing individual employee’s
achievements against the backdrop of the wider labour market. Find out more in our
factsheet on pay progression.
Many organisations expect ‘satisfactory’ performers to progress to a target point in their
pay range. Among private sector service employers, the target is often the mid-point in
the range, while in the public sector it tends to be close to the top of the salary scale. In
the voluntary, manufacturing and production sectors, employers tend to be more split on
where the target is. Read more in our performance-related pay factsheet.
Variable pay: cash bonuses and incentives
Our Reward management surveys show widespread use of bonus and incentive awards,
either to encourage future performance (incentives) or to recognise past performance
(bonuses). However, there are again variations by industry, with such schemes more
widespread in the private sector. Employers often have more than one bonus or incentive
scheme with senior staff usually on a different arrangement.
Among those employers offering a performance-related reward scheme, the most
common individual performance-related variable schemes are individual bonuses and
sales commission, while profit-sharing and gain-sharing are the most common group
performance-related plans. See more in our factsheet on bonuses and incentives.
The advantage of variable pay schemes is that they can link earnings closely to desired
performance and, in theory, only pay out when there is reason to do so. Variable
elements of pay do not generally feed through into other elements, such as overtime or
pension contributions, and so create no additional on-costs.
Fair pay and the UK legal position
In all pay and reward policies, UK employers must meet legal requirements, for example,
on equal pay and the National Minimum Wage, as well as reporting on the organisation’s
gender pay gap and chief executive pay ratio. Find out more in our factsheet on pay
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fairness and reporting.
The National Minimum Wage applies to all workers aged 16 and over. There are currently
four categories covering apprentices, workers aged under 18, those aged 18 to 20, and
those aged between 21 and 24. The National Living Wage applies those aged 25 or over,
with those aged 23 and 24 eligible from April 2021, and a target to lower it to age 21 and
22 by 2024.
While not a legal requirement, almost 8,000 organisations employing over 250,000
workers have signed up to the voluntary Living Wage.
Equal pay is an aspect of sex discrimination law giving the right for men and women to be
paid the same for the same, or equivalent, work. However, despite legislation, there are
still significant gender pay differences. Large employers are required to report annually
the size of their gender pay gap.
People professionals need to be aware of the regulatory background and corporate
governance standards when setting rewards for senior employees, including the
requirement for large, listed UK businesses to publish and explain their chief executive
pay ratios from the start of 2020.
Our most recent report on Executive pay in the FTSE 100 found that CEO remuneration fell
marginally over the year. Listen to our podcast exploring executive pay and what
motivates top earners.
We commissioned research examining CEO reward from a behavioural science viewpoint
and its impact on the rest of the workforce. Read our reports The power and pitfalls of
executive reward: a behavioural perspective and The view from below: what employees
really think about their CEO’s pay packet.
Our RemCo reform report explores how executive remuneration governance could be
improved by broadening the remuneration committee’s remit to look at the outcomes of
how people are managed, developed, rewarded and recognised. We recently examined
the extent to which employee issues have an impact on performance-related pay for CEOs
in the FTSE 100.
UK law also requires employers to provide certain workplace benefits, such as a pension
scheme or paid leave.
The role of employee benefits
Many employers offer a wide range of benefits, from traditional items such as paid leave
and occupational pensions, to newer elements such as paid leave to adopt a pet.
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Benefits are provided for a variety of reasons including to match market practice, give
some measure of health or disability security, or retain employees. Some benefits are
required by law or are tax efficient.
There are various ways of offering benefits. For instance, flexible benefits schemes (also
known as ‘cafeteria benefits’ or ‘flex plans’) allow employees to vary their benefits package
to meet their individual needs.
Other issues to consider include how the benefits offered support the needs of the
organisation and its employees, and how to communicate what benefits are on offer.
Read more in our employee benefits factsheet.
Non-financial rewards and total reward
While pay and benefits are important, and getting them wrong can have adverse
consequences, and they are not the only rewards that employers should consider.
Research shows that non-financial rewards can be just as important. These include:
Good performance management.
Opportunities for personal and career development.
Flexible working.
Being involved in decisions that affect how and when people do their work.
Recognition, such as through an ‘employee of the month’ award or team-based
events.
Reward strategies that mix non-financial provisions with pay and benefits are often known
as total reward approaches. Read more in our factsheet on strategic reward and total
reward.
Useful contacts and further reading
Contacts
Acas – Pay and wages
GOV.UK – PAYE and payroll for employers
Books and reports
ARMSTRONG, M. (2019) Armstrong’s handbook of reward management practice:
improving performance though reward. 6th ed. London: Kogan Page.
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LIVING WAGE COMMISSION (2016) Closing the gap: a living wage that means families don’t
go short: the final report of the Living Wage Commission.
LOW PAY COMMISSION. (2019) The National Living Wage: beyond 2020. The Commission.
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and
contexts. 4th ed. London: Chartered Institute of Personnel and Development and Kogan
Page.
ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals.
London: CIPD and Kogan Page.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in
print.
Journal articles
BASKA, M. (2019) Government rejects key recommendations on curbing executive pay.
People Management (online). 17 June.
COTTON, C. (2020) CEO pay: complex solutions for complex problems. CIPD Voice. Issue
26, 16 November..
HOWLETT, E. (2019) Two decades on, has the minimum wage worked? People
Management (online). 28 September.
OLSEN, S. (2018) Why fair pay is a potent weapon in the war for talent. Strategy + Business,
Issue 90, Spring. Reviewed in In a Nutshell, issue 75.
PISSARIS, S., HEAVEY, A. and GOLDEN, P. (2017) Executive pay matters: looking beyond the
CEO to explore implications of pay disparity on non-CEO executive turnover and firm
performance. Human Resource Management. March-April, Vol 56, No 2. pp307–327.
Reviewed in In a Nutshell, issue 67.
CIPD members can use our online journals to find articles from over 300 journal titles
relevant to HR.
Members and People Management subscribers can see articles on the People
Management website.
This factsheet was last updated by Charles Cotton.
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