A Small Business Guide to Remuneration

We take a look at you can reward remuneration in the best way – for both you and your employees

A Small Business Guide to Remuneration

The remuneration package is what binds you and your employees together – fail to pitch and fine-tune it correctly, and you will find yourself unable to attract or keep the standard of workers you want and need (no matter how rewarding you think the job is in itself). If you want to employ and maintain the best possible workforce, you must be able to sell the package properly and tailor the rewards to ensure employees stay with you.

This guide will help you to calculate what wage to offer, keep in line with minimum wage regulations, organise pay reviews and rewards, and more.

How do I know what to pay?

Any remuneration package needs to comply with the basic levels of pay set by law – national minimum wage (NMW). NMW currently stands at £3.87 for workers aged 16-17, £5.30 for workers aged 18-20, £6.70 for workers aged 21+ and £3.30 for first-year apprentices/apprentices under 19 years-old.

The first thing to consider when calculating remunerations is the market rate – unless you offer a package equal or higher than this, you won’t attract the employees you need. To establish this, you will need to conduct external research to determine what the standard of remuneration for the job-type is.

When doing this, you need to consider what skill set you need, and you can compare these rates by checking them against similar jobs offered. Some useful resources include local employment agencies and jobcentres, national newspapers, and online recruitment agencies.

For highly specialised skills, you should also have a look at trade publications and professional journals.

Another consideration is the calibre of employee you’re after. A higher salary could persuade a strong potential employee to seek work with you rather than a competitor.

Finally, consider barriers to recruiting people and your economic situation. Can you afford to offer a salary above that offered by your competitors or will your company’s location cause issues?

Paying an employee by time or performance

Deciding this is usually a matter of establishing what is standard based on industry traditions or expectations.

Weekly wages suit companies with fixed working days, or with shorter/irregular hours. If you pay by the hour, you may end up paying huge amounts of overtime if demand fluctuates. Piece rates couple pay with productivity, so you pay the employee directly for the quantity of work they perform.

Finally, annual hours contracts offer flexibility, and this will mean you’ll also avoid paying a premium for overtime.

Devising your business’ pay structure

Any pay structure should be logical and reasonable – if not, you may face unrest amongst those who subject it to scrutiny. Key ways to do this is by ensuring different levels of pay are comparable so that employees see that their pay is relative to their position, and full-timers and part-timers understand that their pay is equal to the amount they do.

Another way to keep your business’ pay structure transparent is by recording all decisions and information about your processes. Employees have a right to ask questions about pay levels and use equal pay questionnaires – you need to be able to withstand any probing.

Make sure to follow your legal obligations, consider tax and NI thresholds (try to avoid salaries that put the employees just above one threshold), and work out how much overtime is likely, and how you will value it.

Finally, consider conducting an equal pay review as this can help you counter any structural problems in your pay structure. You should also look at paying shareholders in dividends rather than income – dividends attract income tax, but not NI.

Bonus payments and commission

Awarding bonus and commission payments can be a great way of incentivising employees – but unless they ARE seen as extras, and unless they reward tangible, significant effort, they will likely result in more discord than harmony. When paying bonuses or commission take a few things into account.

Performance bonuses should be significant to the employee in order to motivate –10/20% of salary is standard. With commission payments, make sure they are not too high compared to basic pay as this can foster an unsavoury, cut-throat atmosphere.

Incentive pay should award specific achievements and at different levels – though avoid awarding the same employee/team.

Finally, consider profit-related pay rewards indiscriminately – a reward for everyone can motivate and unify everyone.

What about company share schemes?

Share schemes and share option plans can be an excellent long-term motivator – by giving employees a stake in the business, they can directly reward the role of the workforce in boosting the value of the company.

HMRC approved schemes include Share Incentive Plans (formerly All-Employee Share Ownership Plans), Enterprise Management Incentive schemes and Seed Enterprise Investment Schemes. Shares purchased within these can only be held for the period specified. You can also set up unapproved schemes, and these can be established on a larger scale but do not offer as many tax breaks.

Shares held by employees can count as business assets for CGT purposes and employee-shareholders are exempt from CGT on gains on shares worth up to £50,000 – but they surrender some employment rights.

What other benefits can I offer to my employees?

Non-monetary remunerations can be a way of incentivising employees that do not require hefty tax payments. For instance mobile phones, discounts and bicycles provided by employers or within the business are not taxed.  Also living accommodation can be tax-free if the employee has to live somewhere specific to do the job.

Personal loans of up to £10,000 are also a good way to award staff and are not taxed. Additionally long term service awards are not taxed, as are annual/Christmas parties (provided that they cost less than £150 a head).

Other ways that to award employees are with a car or holiday. Company cars remain popular though most of the tax incentives have gone. Paying for an employee’s parking space near home or work could be a cheaper alternative. A

Finally, consider offering flexi-time working and training. Both can be a powerful motivator for employees with irregular schedules and ambitious employees are often keen to learn skills that will help them advance, and providing training can make them more valuable to you.

How should I conduct pay reviews?

You will need to regularly review your remunerations packages and policies to ensure your employees stay incentivised and motivated.

When conducting a pay review make sure to incorporate steady earnings increases for employees and a performance-related element for all employees; also distinguish between promotions and pay increases and finally involve any relevant unions in the review.

Keeping employees motivated is key to any business’ success, and remuneration is an important part of this. For other tips on keeping your staff motivated, check out our guide here.

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