Sheila Attwood, pay and benefits editor at XpertHR, examines reward and employee benefit management in a time of budget constraint

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Pay increases for the majority of employees exceeded inflation this year for the first time since 2009. That year was a low point, with most organisations freezing pay, and it has been a long, slow haul back since then with modest pay rises the norm.

For those now planning for next year's pay reviews, in a time of continued budget constraints there are a number of factors that you need to take into account when deciding on the value of any increases. At the same time you will need to consider the whole package on offer to encourage employees to come and work for your organisation, and stay with it.

In line with the reward strategy

The first port of call will be your organisation's reward strategy. This describes how reward is going to be used to meet business objectives. For example, if the business wishes to encourage innovation, a recognition scheme or appraisal criteria could be used to reward these behaviours. If reducing the cost base is a priority, then the organisation should monitor the impact of reward initiatives and look at how reward is communicated to employees to ensure the best impact from reward programmes. When purchasing benefits it should use commercial procurement strategies to gain advantages of economics of scale.

The strategy will also give you pointers on how to distribute the available budget between the different aspects of reward – salaries, incentives and benefits – and what other initiatives could be used to attract, retain and motivate staff.

Value of the pay review

The budget available for the annual pay review will be dependent on a number of factors, including your organisation's ability to pay, the ease of recruiting and retaining employees, inflation rates and what other businesses are paying.

XpertHR's research finds that recruitment and retention pressures are currently being felt for specific roles and skills rather than across the board, so are best dealt with on a case-by-case basis, targeting payments to secure the right individual or where there is a flight risk. A salary benchmarking exercise will determine the market rate for particular roles - but also think about what else might attract an individual to your organisation.

In the years preceding the recession there was an identifiable link between inflation (almost exclusively the retail prices index, or RPI measure) and the level of pay awards. We are no longer seeing any causal link between the two, but inflation will be the key benchmark for employees measuring the value of any pay award.

Data on what other organisations are paying is available from a number of sources, including XpertHR, which publishes both pay settlement data and a range of salary surveys. In the private sector, the going rate for across-the-board pay increases has been 2% for the best part of five years now, and employers surveyed earlier in the year expect 2% to stick through to the beginning of 2016 too. Keeping track of what others are paying will enable you to make informed recommendations and decisions about pay.

Benefits

You need to strike the right balance between pay, benefits and intangible elements of reward.

When it comes to benefits, there is increasing pressure for employees to be able to tailor the package to suit their needs and wishes, while organisations are focussed on providing benefits in the most cost-efficient way.

Leading the way in both flexibility and cost savings is salary sacrifice, used by more than half the organisations surveyed by XpertHR, for benefits such as childcare vouchers, pension contributions and cycle-to-work schemes. Voluntary benefits - either offered through an external provider or arranged locally - are another low-cost but attractive addition to the employment package.

Telling the story of reward

Employees typically underestimate the value of their reward package, so communication is vital to gain maximum return on your investment in pay and benefits. Don’t forget to include both monetary reward and those less tangible elements such as flexible working, wellbeing programmes and learning and development opportunities in the communications plan.

Understanding the full extent of their reward package will have a positive impact on employee engagement, motivation, and their attitudes and behaviours - which will all help to deliver business success.

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