UK: MERGERS USUALLY MEAN MISALIGNMENTS - IN PAY. - Ironing out pay differentials is seldom easy for companies.

Last Updated: 31 Aug 2010

Ironing out pay differentials is seldom easy for companies.

It's a rare employee who will happily do the same work as a colleague while expecting a markedly smaller wage slip at the end of the month. Equally rare are general managers who feel no pain at having to pay staff over and above the company's normal rates. Such pay inequalities frequently arise when one business acquires another whose operations it seeks to integrate. So how quickly should managers who find themselves in this position aim to merge pay-scales? From the moment the new workforce is added to the payroll?

In practice, salaries are the hardest element of staff employment benefits to harmonise, so the tendency is for firms to tackle every other pay-related issue first. Glaxo Wellcome, whose workforces merged last spring, set up a taskforce at the time to evaluate pay and benefits throughout the new organisation. The company is hoping to implement all non-salary changes within the next two years, and intends to phase out perks which are considered over-generous,' explains Tim Miller, Glaxo Wellcome's human resources director.

But when it comes to salaries, the biggest part of the package for most employees - and the most difficult to slash - Glaxo Wellcome is proceeding with caution. The company is simply 'red circling' those salaries which it regards as too lavish, and ensuring that the employees concerned either receive no increase at all or that any increase remains paltry until such time as counterparts have caught up. Granada Forte has a similar policy, according to HR director Stephanie Monk. Indeed, Howard Coate, head of HR consulting with remuneration specialists Watson Wyatt, reckons that firms adopting this approach outnumber others 10:1.

'On everything else - pensions, incentive schemes, share ownership, cars - we are fast and decisive,' claims Brian Brooks, group HR director at WPP. In the matter of salaries, he admits, things 'tend to move gradually in the right direction over years'. People who appear significantly overpaid 'come under greater scrutiny because more is expected of them. They must continue to have a growing role with more responsibility. If not, they are very vulnerable. There is a higher risk of their losing their jobs.' Brooks adds that 'where there is a huge difference between what people are paid and what they are worth, they can be surprisingly receptive to the prospect of a salary cut. Rather than be fired, people would rather take a cut in pay.'

But any company which aims to erode differentials over time could be placing a lot of reliance on inflation, as Robert Ward-Jones, legal director and company secretary of Rentokil, points out. 'In a low-inflation environment, this (erosion) is going to be more difficult if salary differences are significant.' However Ward-Jones thinks that Rentokil would not ask staff to accept an absolute reduction in salary unless - if offered the choice of redundancy or a lesser position - they were to opt for the lesser job and lower income. 'This does not happen very often.'

Coate commends another approach which was adopted by one of the insurers.

The company elected to pay out lump sums in exchange for salary reductions of approximately 20%. There was an assumption that each of the affected members of staff would stay with the company for a further three years at the existing salary. The value of the differential was discounted to present value - then to some extent discounted again. Nevertheless, says Coate, the employer 'lost very few people. Of course, there was some disgruntlement but it was offset by the fact that the company made a parallel commitment to help anyone in this situation acquire skills to position themselves for a better job' - within the organisation.

The issue most often raises its head when companies are merging, but it can also arise when businesses demerge or hive off separate units, says David Patterson, director of expertise at Hay Management Consultants.

When British Gas established its retail arm, for example, staff suddenly found themselves overpaid by a retailing benchmark, and were asked to accept lesser conditions.

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