Setting and reviewing salary levels is a key business process for recruiting and retaining employees in line with your business needs.

Obtaining market rate information

There are many publication tables focusing on salaries; one of the best known is the Average Earnings Index (AEI), published by the Office of National Statistics. However, because the AEI covers such a wide spectrum of job types in different regions, its application to your company's pay structure may be somewhat limited.

To get a better feel for the 'going rate' of a particular job role in your industry, monitor advertisements in national and local newspapers, sector-specific journals, and online recruitment websites, as well as through word of mouth. This will also give you an idea of what your competitors are offering. Make sure that your salary levels are not substantially lower than your competitors' levels, otherwise you risk losing key staff to them.

When making an offer of employment it is a general rule to pay for experience and skills rather than untested potential. It is also accepted that you won't make an offer below the applicant's current salary.

Pay structure

Many businesses have pay grades – these are internal classifications based on the level of skill, level of experience and management responsibility of the employee. Even if you don't use formal pay grades, it is still a good idea to have in place a written policy on salary levels so that employees can be assured that consistent criteria are being applied.

When to review salaries

Most employment contracts contain a clause that obliges employers to review salary levels at a specified time of the year or after a specified length of service. There are other times when you may consider reviewing salaries, for example, when promoting an employee.

Conducting salary reviews

The first step is to establish how much money your business has in its budget to allocate to pay increases. Take into account turnover projections, market fluctuations and recruitment requirements.

The rate of inflation is widely used in salary bargaining: the argument is that if the 'cost of living' has gone up by x% then this should be matched by an increase in pay. However, the rate of inflation should only be used as a guide. When inflation is low, for example, some employers will use a higher increment.

Consider whether you will use the same percentage increase across the board, or if increases will differ in accordance with the various pay grades or job functions. Also decide if new recruits will be reviewed in the same way as their longer-serving colleagues.

Good practice

Many employees associate salary reviews with performance reviews. Although pay is inextricably linked to performance, it is better practice to keep salary reviews separate from the appraisal process. It is also good practice to evaluate an employee's salary separately from any benefits they receive.