CONTROL

Control over the implementation of pay policies generally and payroll costs in particular will be easier if it is based on:

• a clearly defined and understood pay structure;
• clearly defined pay review guidelines and budgets;
• well-defined procedures for grading jobs and fixing rates of pay;
• clear statements of the degree of authority managers have at each level to decide on rates of pay and increases;
• a personnel (HR) function which is capable of monitoring the implementation of pay policies and providing the information and guidance managers require and has the authority and resources (including computer software) to do so;
• a systematic process for monitoring the implementation of pay policies and costs against budgets.

These aspects of control have been covered elsewhere in this book, but there are three further features of a control system which need to be considered; namely, the control of grade drift, the problem of devolving authority to managers to develop 'ownership' of the reward management processes in their departments while still retaining control, and the provision of control information.

Control of Grade Drift

Grade drift - the tendency for people to be upgraded without a justifiable increase in their job size - can be controlled by the following methods:

• using a strong evaluation panel trained in the job measurement methodology on a formal basis and advised as necessary by an independent expert;
• insisting on rigorous comparisons with well-established benchmark jobs - the re-evaluation of such jobs should be a major exercise;
• ensuring that panels ask pertinent questions on any claims that an increase in responsibility justifies regrading - among these questions it is useful to ask, not only what the increased responsibilities are, but also how they have arisen and what effect this will have on another job if it has lost those responsibilities;
• requiring a sponsoring manager to provide supporting justification;
• resisting demands from managers for jobs to be regraded simply because of market rate pressures, difficulties in recruitment or threats to leave to get more money. If these concerns are genuine there are better ways of dealing with them than upgrading by, for example, reconsidering market stance policies, market rate premiums or creating special market groups. What must not be allowed to happen is upgrading someone simply in response to threats.
  
  

Developing Ownership Without Losing Control

We have frequently referred to the concept that line managers should take ownership of reward practice. This is an aspect of empowerment - devolving down the line the responsibility for making decisions on key management issues - and pay is definitely one of these issues.

Devolution does not mean abdication, and the following steps are required to ensure that freedom is exercised within the framework of generally understood guidelines on corporate pay policies and how they should be implemented:

• Discuss and agree with managers, team leaders and staff the key reward processes which will maintain standards throughout the organization - these will include processes for job evaluation, tracking market rates, performance management, performance rating and paying for performance, skill or competence.
• Ensure that all concerned thoroughly understand and appreciate the new freedoms and their associated responsibilities.
• Train managers and team leaders so that they have the level of knowledge required to make informed, business-led decisions about reward - the aim is to ensure that they are 'pay literate'.
• Develop computerized personnel information systems that reduce all the bureaucratic reporting which has been necessary in the past. As Clive Wright, then Manager, Corporate Remuneration, ICL, said at the Compensation Forum in January 1993:

  Recording and reviewing the key business numbers at the centre, without involvement of the line operations, is essential, if you want to convince people that empowerment and reduced bureaucracy is actually happening. As long as we keep asking people to send in reports, fill out forms, and sign off changes at detailed levels, no one will believe anything has really changed.

• Ensure that the central remuneration specialists change from a controlling to a guidance and support role.
• Spell out to all concerned that in providing this guidance and support the HR function has a duty to audit reward management processes departmentally to ensure that they are being used in the most effective way. It must be emphasized that the organization has every right to see that proper procedures are being followed and that, where appropriate, consistent policies are being applied.
• Ensure that managers understand and accept the principle that while they may have a fair degree of independence they are still interdependent with other operating units. They must therefore consider the implications of what they are doing on other parts of the business.
• Achieve, as far as possible, a reasonable balance between empowerment and control. The aim must be to give managers the maximum space and freedom to act. But it is still necessary to ensure that their actions do not contravene fundamental reward management policies and guidelines, or prejudice the overall impact of reward processes as a means of helping the organization as a whole to move forward in accordance with its strategic plans.
  
  

Pay Review Documentation

The pay review documentation for line managers is best dealt with by a spreadsheet. The information should consist of:

• name, job title and present salary of job holder;
• details of last pay increase - amount, date and reason;
• performance rating;
• proposed increase - amount and percentage.

The individual details on this spreadsheet should be totalled so that the percentage increase to payroll overall can be calculated and compared with the budgeted figure.

CONTROLLING PAYROLL COSTS

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.