Apr 2, 2011


Pay Review Budgets

Pay review budgets for managers set out the overall increase in their payroll that they are allowed to recommend for their departments to cover the cost of competence and/or performance-related awards. This is the basic control mechanism, and managers should be required to keep strictly within their budgets and own the financial consequences of so doing.

In Bass Brewers, for example, control is exercised mainly through the pay review budget but managers are also expected to use their judgement in controlling progression by reference to a pay policy line based on market rate comparisons and the rates of pay for people carrying out similar jobs in their departments.

Review budgets restrict the scope for managers to make excessive awards leading to unjustifiable grade or band drift. But by themselves they will not prevent drift. Additional control is required by careful monitoring of the distribution of pay in grades or bands to ensure that anomalies and drift do not occur. Peer reviews or moderating processes can be used which enable out-of-line payments to be identified and thus provide for consistency. These involve getting groups of budget centre managers together to exchange information about their proposals and, if challenged by one of their colleagues, justify them. Such reviews should specifically check that the levels of pay for people in similar roles are consistent with the levels of competence and contribution demonstrated by them.
Some companies, such as Zeneca, give managers a pay review budget at the beginning of the year and get them to plan how they can use this most effectively to help them to achieve their business plans. For example, if a manager is controlling a number of key development projects, he or she might reserve some money for awards to project teams when they complete their project satisfactorily or at predefined milestones.

Pay review budgets are usually only concerned with performance or competence/skill-related awards. They may not therefore control the payroll costs arising from new appointments, transfers and promotions. Some companies set budgets which control increases arising from promotions and upgradings as well as variable pay. Others aim to achieve complete control through total payroll budgeting.

Total Payroll Budgeting

The problem with pay review budgets is that they do not control total payroll costs within departments. These are, of course, dependent on the number of people employed in different roles and their rates of pay. Payroll costs vary as a result of changes in those numbers and increases in pay arising from general and individual pay reviews; the amount of pay offered to new, promoted or transferred staff (which, if they replace existing staff, could be higher or lower than the rates paid to those replaced); and the extra pay earned by staff on promotion or upgrading.

A total payroll budget is based on present payroll costs adjusted for forecast changes in the number and mix of those employed in the budget centre and the forecast cost of general and individual pay increases. When budget centre managers are held accountable for their total payroll costs this means that they have to justify the numbers and types of staff they employ and any increases to payroll costs they believe are required to cover pay reviews, promotions and additional costs arising from recruitment or transfers.

When preparing their budgets, managers are issued with guidelines on what they should allow for general and individual pay review increases and they will be expected to keep within these guidelines when preparing the budget and conducting their pay review. If the financial performance of the organization means that more money can be made available to fund competence- or performance-related increases, then these budget guidelines may state the extent to which extra pay costs arising from such increases can be included in the budget.

When submitting their payroll budget proposals, budget centre managers can make out a case for an increase in their budget above the guidelines to cover anticipated extra staff, promotions or increases in responsibility (role enlargements). But they would have to justify these increases in added-value terms; in other words, they would have to prove that the income generated by these additions will exceed the cost of them. Increases must be self-financing. Conversely, if they are able to plan the maintenance or increase of present activity levels and outputs by reducing staff numbers, they can make out a case for using the extra cash thus released to fund competence-related, performance-related or career development increases. These can be used to reward staff for the additional contributions they deliver against rising expectations.

This approach means that some budget centre managers might have more cash than others to reward their staff. This could result in inequities unless the awards are fully justified. Such proposals would therefore need to be subjected to rigorous assessment. Subsequent rewards would also need to be monitored carefully. Payroll budgets can be flexed during the year in response to changes in activity levels or new projects. Many companies have interim reforecasts once or twice a year which require managers to review their original budget in the light of experience to date and amend it as necessary.

Control is exercised over budget expenditures by regular reports analysing variances, which budget managers may be required to explain and deal with.

This type of budgeting procedure can enable effective control to be maintained over payroll costs and restrain managers in a relatively unstructured pay system from overpaying staff. But full control still requires monitoring and peer review (moderating) processes.

The critical pay budgeting issue is the quality of understanding and ownership line managers have of their budgets. For many, this is an area where considerable support from personnel is still needed - a role in which the consultancy skills of HR professionals are increasingly called upon.


arronbond said...

I am starting a business, and I would like to know how to get legal payroll for myself and employees! What do I have to do?


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