How do effective performance reviews support recruitment and retention?

As HR professionals turn to the next round of pay reviews for 2019, there is no ‘one size fits all’ approach. According to our most recent UK Reward Management Survey, more organisations are using a combination of across the board and individually-determined increases, with 36 per cent choosing this method: a nine per cent increase since our last survey. Organisations are redefining the process that works best for them and we are finding that this generally varies by sector and culture.

Sector variation

Construction’s traditional 'pay linked to performance' model is being strained by the management capacity throughout organisations. The ability of managers to have difficult conversations which produce meaningful outcomes and true differentiation in pay is critical. Meanwhile, Healthcare and Energy companies are shifting towards performance management reviews framed by behaviours and competencies as opposed to a pure focus on performance. Private Healthcare is leaning towards an across the board increase or balanced scorecards to structure their reviews. Some have even distributed the annual pay increase budgets to managers who are tasked with distributing this based on their team’s overall competency.

The importance of meaningful pay reviews

Overall, whilst wage growth projections show a slight increase to three per cent for 2018, two per cent remains the most common pay increase. Meaningful pay review increases have a critical impact on continued employee morale. One of the key influences on this for organisations is a budgetary concern: for years, the increase has been around two per cent overall, only just tracking above inflation. Organisations recognise that they need to find the money for higher increases required to retain higher performers. This is particularly acute in the construction, facilities management and property consulting sectors where a UK-wide skills shortage is affecting recruitment and retention.

Differentiating roles with constrained budgets

Our customers are facing challenges raised by differentiating roles in terms of pay where supervisors are being paid the same as regular workers, despite the extra level of responsibility. This makes recruitment harder, especially in the residential care sector where jobs are tough, both mentally and physically. They are losing people who will get paid just as much in a retail role which arguably entails much less stress.

Employers are faced with two options, each giving rise to problems of their own:

1. Reduce the incentive: some employers are offering half a percentage increase more between roles. This raises the question of whether this truly differentiates roles and supports employee motivation. Employers are feeling the pressure to pay a three per cent increase.
2. Address recruitment and retention issues as they arise: other employers are offering high performers out of cycle increases throughout the year. For example, employers in the construction sector are on average offering a three per cent increase at review, then an additional one per cent to three per cent out of cycle increase. However, this impacts affordability and raises the question of sustainability if pay budgets continue to be limited in some sectors.

Achieving true differentiation 

For pay reviews to be an effective tool in employee retention and recruitment, levels need to be meaningful to ensure employees feel like they are being treated fairly and equally.

Our consultants use a compression analysis tool which gives employers another option to truly differentiate pay across organisations. Used in healthcare, residential care, housing associations and retail sectors, this can phase increases across your pay structure. The percentage increase is scaled across all levels to produce meaningful differentiation, whilst ensuring you are paying people fairly based on their level of responsibility.

Equally, some employers are responding to the challenges raised by pay differentiation by adjusting their organisational structure. Some role levels are being eliminated to create clear distinction between bands. This does force some individuals into higher bands, where they are given more independence and expected to manage teams which requires the right level of support from management and appropriate learning and development opportunities.

Sector insight to support your pay reviews 

Two thirds of employers tell us that the wider market’s pay increases also drive their annual pay levels. We can offer this wider support during your annual pay cycle. Our pay award papers set out recommendations for your organisation. Our reports can inform your pay review decisions based on up-to-date, contextual information, factoring in the relevant market and affordability considerations.