Pay progression - Factsheets - CIPD

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Pay progression

Related resources

Revised January 2016

Factsheets
Reward and pay: an overview

In this factsheet
What is pay progression?
The impact of pay structures
Methods of determining pay progression
Coverage of different approaches
Controlling pay progression
Design issues
CIPD viewpoint
Useful contacts
Further reading

Performance-related pay
Guides
Managing age: new edition 2011
Global talent gazetteer
Survey reports
Reward management 2013
Reward management 2014-15
Books
The rise of HR: wisdom from 73 thought
leaders
Employment law : an introduction for HR and
business students

What is pay progression?

Dvds

Pay progression is the process by which an individual employee reaches higher levels of pay within a
pay grade or band. Its often regarded as the measure of real growth in pay. Its distinct from pay rises
linked to inflation (the cost of living) and pay rises associated with a formal promotion to a higher
grade or band.

Training courses

Organisations may put pay progression systems in place to:

support business strategy by encouraging and rewarding desired characteristics or behaviour in
employees
maintain competitiveness of pay while controlling payroll costs within set parameters (including
affordability)
provide employees with a fair and transparent process by which individual pay increases are
determined.

The impact of pay structures

Coaching Skills for Line Managers

Assertiveness for Maximum Impact - Short

courses - Training -CIPD
Base and Variable Pay - Short courses Training - CIPD
Conference details
Tickets and Booking - CIPD Annual
Conference 2015
Tickets and booking - CIPD Learning and
Development Show
Practical tools
Developing performance management
Using HR metrics for maximum impact

Number and width of grades or bands

View all resources

Pay progression is usually determined by two key factors:

the span (or width) of each pay band the degree of variation in pay levels within each band.
the number of pay grades, levels or bands within the structure.
See our factsheet for more information on the design and operation of pay structures
The span of each pay grade or band is sometimes expressed as the percentage increase from the
minimum to the maximum salary in the range. For example, if salaries in a grade range from 30,000
to 36,000, it has a span of 20%. The wider the span, the greater the potential for pay progression
within a grade.

http://www.cipd.co.uk/hr-resources/factsheets/pay-progression.aspx

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Most pay structures in UK organisations today have a small number of grades or bands, with pay
ranges sometimes as wide as 100% or more (sometimes known as broadbanded systems).
Traditional narrow-graded (also known as multi-graded) pay structures feature numerous grades with
relatively small pay ranges. Pay progression in such systems is often based on length of service,
which gives employees a considerable degree of certainty over how their pay will progress in the short
term.

Advancement to higher grades or levels

The focus of this factsheet is pay progression within grades, but its important to bear in mind the
potential for progression via promotion when designing pay structures.
Our report Pay progression: understanding the barriers for the lowest paid looks at the role of HR in
helping those employees in low waged jobs advance into higher-paid work.
Differentials
In a traditional graded pay structure, differentials relate to the percentage difference in pay levels
between the mid-point of one grade and the mid-point of the adjoining grade. The differential needs to
be high enough to reward employees for taking on a post at a higher level of responsibility. In a typical
narrow-graded pay structure, for instance, a common differential would be around 20%.
Overlap
There may be a need for an overlap between the top levels of pay attached to one grade and the lower
levels of the next grade up. This might recognise the greater value of the input from a highly
experienced or skilled individual at the top end of their grade compared with a newly appointed
employee on a learning curve at the lower end of the grade above.

Inflation-linked pay rises

In the most basic form of pay structure or system, such as spot rates (where there is just one pay
rate) for manual workers, it may be that a simple cost-of-living increase is applied to all pay rates
each year, which is simply increasing pay rates for every employee by a percentage broadly in line
with inflation. Such arrangements do not provide any scope for real pay progression.
As employers seek greater flexibility to link pay with performance and a sharper focus on high
performance levels, cost of living pay rises are increasingly rare and largely confined to unionised
environments and/or relatively low-skilled or homogeneous occupational groups.
In the case of more complex pay structures, an inflation-linked adjustment may well also be made
across the structure each year. But this often takes the form of an inflation-based increase to pay
levels or grade ranges across a particular pay structure (sometimes excluding certain levels or
minimum rates, for example to freeze pay for poor performers), rather than necessarily giving each
individual within that structure an identical pay rise. For instance, the pay increase may be linked to
performance and position in the salary range with those below the median getting more than those
above it. A range of other criteria (see below) may then be used to determine individual employees
pay progression along the pay ranges attached to each pay grade or band.
Some employers award both a cost of living increase and a separate award using one or more of the
methods below, or the two factors may be combined in determining a single pay award (particularly
popular at times of low inflation).

Methods of determining pay progression

Length of service
This is a simple form of pay progression where an individual progresses through a number of
incremental pay points with each year of service in the organisation (usually up to a maximum point
that is reached after a certain number of years). Such arrangements may reward the build-up of
expertise in the job and also help with employee retention. However, progression based on length of
service may indirectly discriminate against women as they are more likely than men to take time out of
the labour market to meet family responsibilities.

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Age-related increments
Seemingly outdated in an era where age discrimination is outlawed, exceptions remain in place in
respect of the National Minimum Wage legislation. The minimum rates are lower for young workers to
help them attain their first steps on the employment ladder before progressing to higher levels of pay
as they gain in age. To find out more on the National Minimum Wage, see Useful contacts.

Individual performance-related pay

This approach links individual pay rises with an assessment of an individual employees performance
by a manager or supervisor. The idea is to encourage employees to perform to the highest level
possible.
Read our factsheet on performance-related pay

Team performance pay

A variation on the individual performance pay theme, this involves linking pay increases to an
assessment of performance at team rather than individual level and aims to encourage particular types
of behaviour such as collaborative working.

Organisational performance
Taking the link with performance to its highest levels, organisational performance can be used as a
criterion for pay progression (for instance, by taking divisional sales levels into account).

Competency pay
This approach links pay rises to an assessment of employee competencies in a range of areas
(focusing on the employees input to the job, rather than performance or output), for example customer
service or communication skills.
Find out more about competency in our factsheet

Skills-based pay
Under this system the acquisition of additional skills or specific qualifications levels is linked to pay
rises, in order to encourage employees to undertake appropriate study or training.

Market rates
Pay increases can be pitched to keep pace with rates for similar jobs or regional pay levels in the
external labour market.
See more in our factsheet on market pricing and job evaluation

Coverage of different approaches

According to our annual Reward management survey, the most popular approach to determining an
employees pay progression is to use a number of factors (known as a combination approach). For
example, a mix of individual performance and market rates.
The most common criteria used by employers to manage pay progression include:
individual performance
competency
market rates.
Find out more about our annual reward survey

Controlling pay progression

http://www.cipd.co.uk/hr-resources/factsheets/pay-progression.aspx

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While modern pay structures often aim to allow extensive flexibility and scope to reward higher levels
of performance or contribution, employers still need to control overall payroll costs.
Under service-related pay progression arrangements, a good degree of control is built into the system
as each individual can only achieve one increment each year, up to a set level. But, because they
effectively guarantee progression to the maximum of the pay scale, employers could still face high
wage bills. This is particularly true when staff turnover is low and staff are clustered at the top of each
pay grade.
Controlling pay progression is particularly pertinent in more flexible pay structures, such as
broadbanding. A variety of techniques may be used including:
Target (or reference) points. Under individual performance (merit) pay arrangements, for
instance, it's common for satisfactory performers to progress to a target point in their pay
ranges. Once someone reaches their target point, the rate of pay progression may be reduced.
For instance, while someone who was deemed a good performer may get a 3% increase if they
are below the reference point, they may only get a 2% increase if they are above it. This target
point tends to be set around the middle of the range among private sector employers. In the
public sector, that target is usually much closer to the top of the range, perhaps around 80%.
Zones. The use of zones involves dividing each pay band into, say, three zones and specifying
that individuals could only progress to the next zone up for some exceptional reason. This is
particularly useful for employers with a broadband system.
Cash bonuses. For example, a reference point could be set at some point in the pay range
beyond which cash bonuses might be paid rather than consolidated increases.

Design issues
Employers should consider the following issues when setting or reviewing pay progression
arrangements.

Matching pay progression arrangements with business needs

Any approach towards pay progression needs to fit the organisations business strategy and ethos. For
example, in a business that is highly dependent on collaborative working, team-based pay progression
might be more appropriate than individual performance-related pay.

Equality in arrangements
It's important to ensure that arrangements for pay advancement are free of unfair and/or unlawful bias
in relation to an employees age, gender or other protected characteristics.
See our factsheet on equal pay

Communicating with employees

Letting employees know how an existing pay progression system affects them can be a complex or
sensitive task, as can devising and changing pay progression arrangements. Effective employee
involvement and communication is therefore paramount, and employers should pay particular attention
to the line managers who will be closely involved in implementing the systems.
Find out more in our factsheet on employee communication

CIPD viewpoint
Approaches to pay progression need to meet both the business needs of the organisation (and to be
sufficiently flexible to adapt as those needs change), as well as the aspirations of employees, in a fair
and non-discriminatory way. Employers should review their systems of pay progression on a regular
basis and consider alternative approaches if existing arrangements are no longer able to meet these
needs.

Useful contacts

http://www.cipd.co.uk/hr-resources/factsheets/pay-progression.aspx

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National Minimum Wage

Further reading
Books and reports
ARMSTRONG, M. (2010) Armstrong's handbook of reward management practice: improving
performance through reward. 3rd ed. London: Kogan Page.
INCOMES DATA SERVICES. (2010) Pay progression. London: Incomes Data Services.
PERKINS, S.J. and WHITE, G. (2011) Reward management: alternatives, consequences and
contexts. 2nd ed. London: Chartered Institute of Personnel and Development
Visit the CIPD Store to see all our priced publications currently in print.

Journal articles
Building blocks of reward: progression. (2012) IDS Pay Report. No 1104, September. pp11-13.
FICKESS, J. (2015) Compensation landscape: a survey shows employees' understanding of their
organizations' pay philosophy. Workspan. Vol 58, No 8, August. pp24-26,28.
Organisations base pay progression on multiple factors. (2015) IDS Pay Report. No 1132, January.
pp13-17.
Progression pay takes a step back. (2013) Labour Research. Vol 102, No 6, June. pp12-14.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.

This factsheet was last updated by CIPD staff.

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