What do I need to consider when implementing pay rises?

Many employers are struggling to retain their top talent in the midst of the “Great Resignation” and some may be considering implementing pay rises to encourage employees to stay. While a pay rise may be an effective way to foster employee loyalty and boost morale, there are several issues employers should consider before promising additional pay to employees.

Who will get a pay raise?

When deciding which employees will benefit from a pay rise, you should first consider what you are hoping the pay rise will achieve. If you want to help your employees cope with the rising cost of living, a uniform pay rise across the board for all employees may be appropriate. However, increasing everyone’s pay by the same amount may aggravate your highest performing employees. As a result, they may be disincentivised to maintain their high performance, or may leave your business for an employer they feel will better reward their efforts.

Another option is to offer varying rates of pay increases and link pay rises to performance. If you adopt this approach you should first develop objective criteria to measure employees’ performance against. You should revisit past performance reviews/appraisals and collect any other performance data available. Once you have decided who will receive pay rises and by how much, be sure to document the reasons for your decision. Be prepared for the possibility that some employees may be unhappy and argue that they should have received a bigger raise. There is also the risk of equal pay claims; for instance, if a woman receives a smaller raise than one of her male coworkers who performs the same work. Having a clear, objective justification for why you granted pay rises to each employee will help you defend any such claims.

Pay gaps

Another possible concern when introducing pay rises is that they may exacerbate existing pay gaps within your business. Pay gaps are not the same thing as pay equity. Pay equity means that people who perform the same work, or work of equal value, should receive the same pay. A pay gap measures the difference in the average earnings of two different groups of employees across a workforce. For example, the gender pay gap is the difference between the average earnings of men and women across a workforce. There is a lot of pressure on companies to decrease their gender pay gap, and employers with at least 250 employees will have had to report their gender pay gap to the Government by 4 April of this year. Even if your business is not required to report its gender pay gap, it may be worth calculating it and seeing whether your proposed pay increases will make the pay gap worse.

Another pay gap that has started to receive more attention is the ethnicity pay gap, which measures the difference in average pay between employees from ethnic minority backgrounds and ‘white’ employees. Though the Government recently confirmed they will not require employers to report their ethnicity pay gap figures, voluntarily compiling this data is one method employers can use to promote diversity and address inequality in the workplace.  

Additional employee obligations

If you are considering pay increases as a method to retain your employees, you should also consider introducing additional obligations on them to discourage them from leaving. For instance, you may want to increase their notice period or introduce restrictive covenants that limit their ability to work for a competitor and/or poach clients and other employees if they do leave. When you are introducing new or different restrictive covenants into existing contracts of employment, linking the introduction of the covenants to a pay rise increases the likelihood of these restrictions being enforceable. You should also make it clear to the employee, in these circumstances, that the pay rise is conditional on them accepting the new restrictive covenants.

Increasing your employees’ pay package can be an effective way to reward their hard work and maintain their loyalty. However, it is important you do not make any major decisions without first considering all of the issues and taking legal advice. If you need help implementing changes to your employees’ compensation, contact our Employment Team by emailing employment@warnegoodman.co.uk or calling 023 8071 7717.