legislations in fact some types of payment could be subject to full taxation, whereas
others might be subject to a reduced taxation or even be exempt.
The difficulty of managing a large number of fixed and variable components of financial
reward is not limited to the correct application of fiscal regulations, but extends to the
impact that these payments might have in terms of pension and superannuation
calculations. This is clearly a job for payroll specialists, but in order to be able to design
and develop sound and appropriate reward systems reward managers and specialists
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should definitely be aware of the impact of legislation on financial rewards. Keeping
systems as far as possible simple is hence an approach likely to pay off in every
circumstance.
Table 22 - Total pay components
Fixed rewards
Fixed rewards represent the components of a financial reward package which individuals
are entitled to receive regardless of their performance and indeed of that of their
employer, working unit or team. Fixed salary is usually statutory-determined and
associated with the grade assigned to each individual according to the salary structure
used within the business.
The expression fixed salary can either refer to a single item of pay or to a number of
components which could be included in the salary slip of the employee. All of these
components have in common the characteristic of being received unaltered by
employees over time, unless a pay increase, a promotion or a change of grade
supervene. When pay systems are based on length of service, fixed salary increases also
periodically occur at the frequency set by their mechanism. Such approach, however,
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originally intended to preserve employee purchasing power over time, tends to be the
more and more abandoned by employers.
Fixed rewards are usually determined on the basis of the role each individual covers
within an organization. To each role is associated a grade and to this a fixed or base pay.
Additions to this pay can be individually agreed between employer and employee
according to an individual capabilities, skills and level of expertise.
In some cases, the identification of fixed pay is underestimated by employers. This
should actually be avoided in that some of the components of fixed reward, such as for
instance basic salary, are normally used as the basis for the calculation of the possible
additions and supplements which may be paid on top of base pay, both in a fixed and
variable fashion, to staff.
Components of fixed reward
For centuries, fixed reward has been nearly exclusively represented by basic salary. In
order to develop and design reward packages resulting the more and more attractive
and appetizing to individuals and capable thus of enabling organizations to more easily
attract and retain them, employers have over the years extended their financial reward
offering adding to basic salary a wide range of financial additions and supplements.
Albeit money is considered as a hygiene factor and, in general, not as a good and
effective motivator, employers, for some reasons which are not obviously based on their
willingness to increase futilely their business fixed costs, have invariably paid particular
care and attention to the financial aspect of reward.
Most of the allowances and supplements that employers have introduced in the financial
side of their reward offering are provided to employees on a regular basis, therefore as
additional components of fixed reward into which these are sometimes consolidated. This
clearly entails that these allowances are granted by businesses to their employees with
the precise intent to increase the value of their overall financial reward proposition. The
circumstance employers prefer to grant additional allowances on top of basic salaries,
keeping the former distinct from the latter, is actually linked to two main reasons. On
the one hand employers want to clearly give evidence of the circumstance that each of
the provisions they offer employees is linked to a specific and well identified motive, on
the other hand basic salaries are usually associated with the grades of the reward
systems developed within organizations; salaries which are actually also used as
reference points for the calculation of the further supplements businesses might pay to
their staff. Directly consolidating allowances into basic salaries as a matter of course
might, according to the circumstances, be the cause for the base of calculation of the
additional components of fixed, preservation and variable rewards to sensibly
automatically increase.
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Whether employers should opt to consolidate all of the provisions offered to their staff in
the basic salaries of their pay structures, they would risk sensibly reducing the flexibility
of their reward system and limiting their latitude to managing these effectually.
Additions are in some occasions offered in the form of a specific amount of money
regardless of the grade associated with individuals’ salaries, but in most of the cases
these are offered as a percentage of base pay, which is therefore considered as the
calculation reference for the further payments. Consolidating fixed supplements directly
into the basic pay corresponding to each grade, would not enable employers to manage
these additions in the most appropriate way when eventually required by the changing
circumstances. That is practically why allowances are kept separated from basic salary
by many employers and showed by means of different line items in salary slips. Yet,
although we are definitely looking at fixed components of reward, some of these
allowances could be linked to the existence of specific circumstances and as such to
specific terms and conditions of employment. Keeping separated these elements of pay
from basic salary enables employers to eventually withdraw the payments accordingly
whether the reasons justifying these should cease to exist.
In some circumstances and with specific reference to allowances which are offered as a
fixed amount irrespective of the grade and of the basic salary an individual receives,
employers may prefer opting for a definitive consolidation of these into basic salary. This
is, for instance, the approach that some employers adopt in London as regards the
payment of the London Weighting Allowance.
Reward managers and specialists when designing and developing reward systems within
an organization should pay careful consideration to the number and types of fixed
allowances and supplements they intend to include in their reward offering. The same
care should also be taken with the mechanism of the calculation of these supplements:
fixed amounts or a percentage of basic salary?
In general, in order to keep the reward system as simple as possible, reward specialists
should seriously consider to consolidate into basic salary those allowances that,
whatever the case, will be invariably taken into consideration as base of calculation for
additional components of financial reward and which have to be permanently granted to
individuals regardless of the future occurrences. By contrast, it would be advisable to
keep separated from basic salaries all of those components of fixed pay which are not
intended to influence the calculation of additional components of reward and might be
subject to changes or withdrawal according to the future occurrences.
Once these or other elements affecting pay have been plainly determined by reward
professionals, and hence by the HR Function, and approved by the business board,
reward managers will need to interact with the organization employment law managers
in order to the caveats or provisions concerning the way each pay component is treated
and may be subject to be treated in the future and in which circumstances, to be
included and clearly stated in the individual employment terms and conditions.
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In unionized organizations changes affecting terms and conditions of pay of all the
employees have to be usually discussed, bargained and agreed with trade unions officials.
In these cases employers should be hence extremely cautions and restrain themselves
from taking action unilaterally. Bargaining procedures with trade unions representatives
are not clearly required whether agreements about pay would be individually negotiated
and reached with some employees.
Determining how these additions have to fit in with the overall reward system
mechanism, namely with job evaluation and eventually market pricing, represents a
further challenge for people in charge of reward within the business. Unfortunately, it
would not be minimizing the impact and importance of all of these aspects that reward
specialists will be able to design and introduce sound and effective reward systems;
these problems need hence to be appropriately and effectively tackled from the outset.
The final aim being to identify the most suitable and consistent solution to determine
fixed pay that is the right combination of basic salary and allowances and the way these
have to be managed the one in combination with the others.
Basic salary
The seminal fixed component of financial reward is basic salary. The term basic is
associated both with the circumstance that this component, although different from case
to case, is common to all of the different reward packages received by every individual
and to the fact that this element actually represents the base upon which every reward
package relies (Management Study Guide, 2012).
Although the word salary has clear Latin origin, it is not completely certain its association
with pay. According to some historians the term salary derives from the Latin word
“sodium”, coin, with which Roman soldiers were paid, but the most accredited theory is
that the term salary refers to “salarium”, salt, whose origin is associated with a specific
allowance Roman soldiers received to buy salt (Oxford Dictionary, 2005).
One of the most important, arguably the most important, feature of basic salary is that
its quantification is and, in order to avoid likely future problems, should have to
invariably been agreed on a written contractual basis. Another distinctive characteristic
of base pay is that it can eventually be increased, but by no means reduced. As
suggested by Torrington et al (2008), basic salary essentially represents the minimum
pay; which in some circumstances constitutes the overall financial reward package
received by an employee, whereas in some other cases it forms the basis for the
calculation, on a percentage basis, of the further supplements which may be added on
top of this. Basic pay, for instance, usually represents a component of secondary
importance of the overall typical financial reward package received by individuals filling
sales positions, whereas for some other groupings, such as administrative staff, it might
virtually represent the overall financial reward package received by employees.
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It is worth recalling that in the past years basic pay, although not negligible in value,
represented a tiny percentage of the overall financial reward package received by
financial industry executives, managers and bankers in general. Indeed, in some cases
and countries, where not mitigated by the introduction of a specific legislation, this trend
is still persisting.
Reportedly, in the early 2000s about 60 per cent of UK’s employees received basic salary
rates only, without any additional supplement or allowance (Grabham, 2003). Indeed, as
seen above, in many instances this is also associated or typical of the different roles and
industries. For example, vis-à-vis the overall salary they perceive, footwear industry
operations staff, on average, receive just slightly more than 50 per cent of their salaries
in the form of basic salary, whereas primary and secondary schoolteachers financial
reward packages are practically nearly entirely formed by basic salary (Torrington et al,
2008).
Allowances and supplements
Allowances and supplements are those additional amounts of money which employers
may pay to their staff for a whole variety of reasons. In general, these allowances are
tendered to employees:
a) To compensate them for the particular circumstances and difficulties these have
to face in order to perform their job,
b) To contribute additional cash enabling them to pay some benefits which
employers cannot directly provide,
c) In recognition of their qualifications,
d) For the specific role they cover within the business.
High cost area allowance
Companies whose premises or offices are located within metropolitan areas are usually
offering to their staff, as a fixed component of their salary, an allowance enabling them
to curb the cost of living in or commuting to the city centre.
A “City Compensatory Allowance”, fully taxable, is for instance offered to people working
in high cost areas of India such as Delhi and Mumbai (Karvy, 2007). However, the
seminal example of this kind of supplement is definitely represented by the London
Weighting Allowance paid by employers to staff working in the Greater London Area. As
claimed by the London Weighting Advisory Panel (Greater London Authority, 2002) the
reasons for the payment of this allowance are basically represented by “cost
compensation and worker retention.” According to evidence gathered over the years by
the Panel, the payment of the London Weighting is necessary in order to employers been
able to attract and retain staff, insofar as the Panel members take as axiomatic the
circumstance that the allowance needs to be paid and consider that the only question as
regards the allowance is not “why?” to pay it, but rather “how much?” to pay.
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The provision is indeed paid not only to individuals working in the hearth of the city, but
also to those working in London intended in the more extensive idea and physical
territory of Greater London Area. In general employers consider three areas: Inner
London, Outer London and Fringe London and offer employees a different allowance
accordingly.
Findings of a relatively recent survey carried out by the Incomes Data Service (IDS,
2011) over 166 organizations revealed that nearly 65 per cent of public sector
organizations did not increase the allowance between 2011 and 2012, whereas those
which did offered an increase between 0.5 per cent and 4.9 per cent. Even though the
rate of private sector employers offering an increase of the allowance was slightly lower
(60 per cent) than that recorded by the public sector organizations, the rate of increase
offered by the former, ranging from 2 per cent to 8.9 per cent, appeared to be sensibly
higher.
One of the most compelling reasons for companies offering employees a high cost area
allowance is certainly represented by the particularly expensive cost of living in general
and of housing in particular typical of the concerned areas. Research reveals that in April
2012 the average cost for a property across Wales and England was of £160,417,
whereas during the same period in London the average price of a house reached
£360,721, being hence approximately 2.2 times higher than that recorded in Wales and
the rest of England (Labour Research Department, 2012). Similar differences also
emerged as regards the price of rented houses.
Analysing and comparing salaries data it also emerged that the average male employee
in London receives a financial reward package worth 32 per cent more than that received
in the rest of the UK. Taking into consideration that in London are located the
headquarters of many big corporations and financial institutions, which entails a high
presence of well-paid senior managers and executives, the entity of such a difference
can be considered self-explanatory.
Despite organizations usually offer high cost area allowances based on the distance
between employees’ homes and central London, some companies in order to attract and
retain employees in their greater London area branches and headquarters have more
recently developed different approaches:
Some organizations have designed national salary structures including inner,
outer and fringe London areas weighting;
Some others have developed completely separate pay structures for individuals
working in London, as for instance have done many schools and, in some cases,
Civil Services;
Some employers, such as retailers, have developed pay structures based on
zones including London and the South East (Unison, 2012).
The Royal College of Nursing, in order to substitute the London weighting allowance, has
adopted an approach based on paying supplements calculated as an additional
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percentage of basic salary, setting in any case a minimum and maximum amount
payable to the individuals concerned (Royal College of Nursing, 2012).
High cost area supplements from 1 April 2012 – Royal College of Nursing
Area
% of basic
Minimum payment
Maximum
salary
payment
Inner London
20
£4,036
£6,217
Outer London
15
£3,414
£4,351
5
£933
£1,616
Fringe London
Source: Royal College of Nursing
Findings of a research carried out by the Industrial Relations Service (IRS, 2012)
revealed that 51 per cent of businesses pay a specific London allowance, whereas 44 per
cent have developed specific salary scales or basic salaries for individuals working in
London. The investigation also revealed that nearly 74 per cent of employers offer the
London weighting allowance to staff contractually and without including any caveats
concerning this provision in the individual employment terms and conditions. On the
other hand the remainder 26 per cent of the businesses offering the allowance include in
the contract limitations to the allowance payment depending on management discretion,
entailing hence that employers could unilaterally review at any point in time the amount
of the weighting agreed (Unison, 2012).
The entitlement to the allowance is usually lost when individuals working in a high cost
area are transferred elsewhere. Northern Ireland Civil Servants permanently or
temporary transferred to London, for instance, are entitled to the London weighting
allowance, but in the event they should be transferred to a different area, although at a
manager’s request, they might maintain the allowance only on a mark-time basis.
Whether the decision to be transferred from London to a different location would be
taken on a Civil Servant voluntary decision, the payment of the London weighting
allowance immediately ceases (Northern Ireland Civil Servants, 2012).
Employers can also make high cost area supplements pensionable; according to the IRS
(2012) in the UK about 50 per cent of employers offering this allowance make it
pensionable, the NHS is, for instance, one of them (NHS, 2012). Similarly, Northern
Ireland Civil Servants’ London weighting allowance is reckoned for superannuation
(Northern Ireland Civil Servants, 2012).
Employers having offices in metropolitan districts, and more in general in high cost areas,
not paying any specific allowance to staff working in these zones should seriously
consider to introduce, especially in favour of the employees living in the metropolitan
territory, an additional allowance vis-à-vis the rate offered at national level in order to
enable individuals to better face the particularly higher cost of living characterizing these
particular districts. Companies which are not willing to offer, or cannot introduce, a
specific allowance in favour of individuals commuting from the outskirts of a high cost
area or from neighbouring towns, might alternatively consider to offer to these
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individuals subsidised public transport season tickets. This is, for instance, a very
common practice amongst business having offices and branches in Paris.
Workplace related allowances
In addition to high cost areas and still in the subject of payments of money supplements
associated with the