Pam Loch of Loch Associates Group discusses the fine balance between paying staff too much, too little and the legal amount

While volunteers work for free, most of us work to earn money – and money plays a significant part in the employer-employee relationship. In the current tight recruitment market, money plays a big part in recruiting staff, and with current inflation levels, pay increases have become more important in retaining staff. At the other end of the spectrum, Minimum Wage Act
breaches have seen household names being named and shamed in the media.

How do you know if you are paying the right amount to retain staff and comply with the law?

Are you paying enough money?

Benchmarking is a valuable tool for employers to assess this. More and more of our clients are working with our team of HR consultants, carrying out benchmarking exercises. By comparing compensation packages, employers can gain insights into how their remuneration measures up against the competition. Through benchmarking, employers can collect data on pay rates, benefits, and other compensation. It can then form a part of the decision-making process when considering what salary to offer for a new role, and also act as an independent verifier during pay negotiations.

Salary increases should certainly not be guaranteed, and contracts of employment should state that clearly. The reality though is that, at the moment, with the impact of the increase in cost of living, staff are likely to expect an increase in their pay.

Of course, when you increase basic salary, this has a knock-on effect as it means other benefits related to salary increase as well e.g., pension contributions and enhanced statutory benefits like company sick pay. Rather than increase salary, employers may want to consider making one-off payments, such as a special cost-of-living payment or pay bonuses to avoid a permanent increase in salary.

Bonuses have the added benefit of incentivising staff to perform better. Employers have the flexibility to establish criteria for eligibility and distribution, aligning bonus programmes with strategic objectives. Bonuses can be powerful tools for driving employee performance, fostering a culture of excellence, and rewarding exceptional contribution.

However, disputes may arise when employees perceive unfair or inconsistent treatment in respect of bonuses. These disputes can erode morale, trust and the employment relationship. It is vital, therefore, that employees understand why bonuses are being given, and appreciate that this is a one-time payment serving as a benefit, and acknowledgement for meeting objectives – and not a right to an increase in pay on an ongoing basis for the individual. Clear and transparent bonus clauses in contracts of employment, together with consistent practices will prevent disputes and enhance performance.

Are you paying too little?

The Minimum Wage Act 1998 established a right to a base level of pay to ensure a minimum wage is paid to all workers and employers with the exception of self-employed individuals, volunteers and certain types of apprentices. Workers and employers must be paid at least the minimum wage for each pay period. The pay frequency may vary depending on the employment contract, but it should not result in the employer paying less than the minimum wage when calculated on an hourly basis.  As of April 2023, minimum wage rates increased by an average of 9%, with the National Living Wage (for those aged 23 or over) going up to £10.42.

Employers can get caught out here and think they are paying the minimum wage or above when paying their staff salaries. Employers need to ensure even when they are paying salaries that their staff are paid at least the minimum hourly pay rate. For example, if you had two employees who were both on a salary of £19,776 with one employee working full time and one working only three days a week, the full-time employee would be paid under the minimum wage, and the part-time employee would be paid well over minimum wage. It is situations like this that can result in businesses regularly being caught out and end up facing tribunal claims and fines. The minimum wage requirements and consideration are more complex than you may think.

Ensuring you pay the right amount to recruit and retain staff is important but ensuring that you are incentivising and rewarding them too is equally important. While remuneration is not the sole reason for someone joining or leaving your employment, due to the current economic environment we are living in, it is fast becoming a primary motivator. It’s important therefore that careful consideration is given to how you reward all your team.