Lack of consistency in pay wasting corporate resources and increasing retention risk

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Data on corporate pay rates analysed by Mercer suggests that inconsistency in adhering to pay principles has a dramatic impact on corporate costs and staff retention risks

Data on corporate pay rates analysed by Mercer suggests that inconsistency in adhering to pay principles has a dramatic impact on corporate costs and staff retention risks. The preliminary findings by Mercer have estimated that over-remuneration of UK employees adds on average £3,262 per employee to the annual wage bill. Underpayment also adds risk equating to around £800 per employee to an organisation’s bottom line.

The inconsistency pivots around the contribution of line mangers, who are often less discriminatory in distributing available pay increases than their business would like them to be. This commonly stems from a lack of clarity on the guiding principles for making awards and a natural tendency for them to ‘generously’ reward mediocre performance (leaving them with insufficient budget to recognise top performance). Employees are also confused by the mixed messages they get from the company and their manager, ultimately preferring to trust the grapevine for reliable insights into the company’s pay principles.

Mercer analysed 4,990 employees from 16 UK multinationals earning salaries of up to £150,000 and matched the data against Mercer’s proprietary database containing 40,000 data points from 191 organisations. The full results are being presented to attendees at Mercer’s HR Conference in London on Tuesday 16 March. The analysis was conducted by Mercer to demonstrate how use of data can help HR departments develop a more active leadership role within their organisations. The consultancy is currently expanding the research sample to compare the UK with other European countries.

According to Chris Johnson, Head of Mercer’s Human Capital Business, “Our research shows that companies spend nearly 40% of their revenues on employee pay and yet they fail to deliver their pay policies effectively. Initial data suggests that this leads companies to waste nearly £4,000 per employee, or nearly 8% of their payroll. Employees know that some of their colleagues are over-paid and others are underpaid: this undermines high performance and employee engagement.”

“We support the trend of giving managers discretion over the pay of their people. Companies need to grasp the nettle of communicating clearly to manager and employee alike about pay, and to analysing their own data about how pay policies are operated in practice. Information and insight is the key to effective management of pay and help drive high performance and employee engagement.”

While the impact of overpayment is obvious, the analysis also showed that underpayment causes problems and bears a financial risk. Underpayment may provide an immediate ‘saving’ to the employer, yet while the line manager may be shaving money off their budget, underpayment creates disgruntled employees. Loss of staff to competitors will ultimately generate costs to the company, not only in terms of recruitment and training but also the loss of income that a dormant position no longer generates.

“HR departments need to demonstrate the financial benefits that they bring to the survival of an organisation” continued Mr. Johnson, “With continued uncertainty and profound structural change in the economy, CEOs need the input from strategic leaders in HR to drive the high performance and organisational agility needed to succeed. Compensation is a company’s biggest expense yet it’s typically the most poorly managed. HR has a terrific opportunity now to show that it can strengthen the governance of this cost and deliver substantial benefits to the organisation. However it won’t be easy and it won’t be quick. Effective governance is only possible through rigorous and sustained measures that ensure that the business is consistently and transparently rewarding the right people well.”

Notes for Editors
A relevant graph is available from the press office
Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges.

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