Why did I get this salary? And what does it take to influence it? Pay criteria are the guiding principles that make pay decisions fair and understandable. And with new rules on pay transparency coming, they will soon be more important than ever. Here, we look at what it takes for pay criteria to really do their job.
Most employers say they set pay based on performance, responsibility and competence. Yet it's not always clear to employees what actually affects their pay. Why did the increase happen the way it did? What would it have taken to get more? And what exactly is the basis for assessing what I do every day?
The answer is pay criteria. When they are clear and well thought out, pay decisions are more consistent, transparent and fair. In this guide, we'll walk you through how. Stay tuned!
What Are Pay Criteria?
In short, pay criteria are the principles that underpin how pay is set and developed in your company or organization. They simply define the factors that you as an employer value in setting pay and create a common starting point for managers and employees.
Most often, the pay criteria are part of the company's salary policy, i.e. the overall framework that governs how pay should be set, monitored and communicated in the business.
Is there a fixed, common template for how pay criteria should be designed? No, not really. The criteria that are relevant vary from one business to another and are influenced by factors such as industry, roles and what is regulated in collective agreements. The important thing is that the criteria are clear, objective and possible to apply in an equivalent way.
However, the criteria are often based on a number of recurring key areas, which are then broken down and specified to suit the business. Some common examples:
- Performance and results. Work results in relation to set objectives and expectations.
- Skills and development. Knowledge, training, certifications and how skills are developed and used in the role.
- Responsibilities and requirements of the role. Scope of responsibility, for example for decision-making, quality, planning, management or specific responsibilities.
- Behavior and cooperation. Ability to cooperate, communicate, take initiative and contribute to a good working environment.
- Initiative and problem solving Resourcefulness, suggestions for improvement and ability to solve problems that benefit the business.
- Market factors. Supply and demand for labor in different roles and positions.
What is the Role of Pay Criteria?
As an employer, there are several strong reasons to spend time and energy on your pay criteria. First and foremost, they give employees a clearer picture of what is required to develop their salary, for example through goal achievement, skills development or increased responsibility. At the same time, they create a common basis for assessing performance and work effort, reducing the risk of inappropriate pay differences linked to gender, age or other irrelevant factors.
In practice, the pay criteria also serve as a support in the pay discussion, where goals, expectations and feedback can be discussed in a way that is clear and meaningful to both manager and employee.
Last but certainly not least, when the criteria reward desirable behaviors and results, employees' motivation and willingness to develop are strengthened - a clear win-win for both the business and the employees.
Read more: Four steps to a successful salary review - a guide for managers and HR.
Pay Criteria and the Pay Transparency Directive – What Applies?
The Pay Transparency Directive, the EU's new regulatory framework for transparent and equal pay that is becoming part of Swedish law, makes it more important than ever that pay criteria are up to scratch.
In short, the regulations state that pay criteria must be objective and gender-neutral. In addition, there is an explicit requirement for employees to have easily accessible information about which pay criteria apply and how they are used in practice.
In other words, now is the time to review, clarify and embed your pay criteria, so that you can meet upcoming legal requirements (and take full advantage of all the benefits that come with it).
Read more: Pay Transparency Directive - are you prepared?
Checklist: How to Make Your Pay Criteria Work in Practice
1. Find Out What the Collective Agreement Says
There may be different models for how pay criteria should work depending on which agreement(s) your company is covered by. So start by finding out exactly what framework you have to work within.
In some of the central collective agreements, there are either ready-made criteria or examples and suggestions that need to be adapted and supplemented locally. In other cases, it is entirely up to the company to design its criteria on its own. Contact your employers' organization if you are unsure of what applies.
2. Choose and Define your Pay Criteria
Pay criteria can be both about what is achieved and how the work is done. They can be measurable, for example linked to objectives and outcomes, but also describe behaviors, responsibilities and ways of working that are important to the business.
Also, think carefully about how many criteria are reasonable for you. If there are too many criteria, it risks creating ambiguity and making it difficult for managers to assess what is most important. Instead, choose a limited number (preferably between three and five) that truly reflect what you want to encourage and reward.
Finally, formulate the criteria in a gender-neutral, objective and subjective way. This is a prerequisite for justifying pay differentials on objective grounds and a basic principle of both discrimination legislation and the new Pay Transparency Directive.
3. Examine Whether the Criteria Need to Be Adapted for Different Job Roles
While it is possible to use the same pay criteria across the whole organization, there is often value in adapting them to different roles. You can do this either by adding role-specific criteria, or by giving different weight to the same criteria depending on the job role and responsibilities.
For example, interpersonal skills and customer focus may be particularly important in customer-facing roles, while responsibility, specialist skills or goal achievement may be more important in other positions.
4. Link to Business Objectives
Quality, efficiency, collaboration, customer satisfaction or innovation? What matters most varies between organizations and over time. For pay criteria to make a real difference, they need to clearly reflect the goals and behaviors that drive your business forward, both here and now and in the longer term.
It's all pretty self-evident: when pay criteria are linked to business objectives, pay setting becomes a concrete tool to steer development in the desired direction and ensure your competitiveness.
5. Make It Crystal Clear What the Criteria Mean
Terms like "high performance" or "good teamwork" sound nice, but what exactly do they mean? Avoid vague and sweeping phrases that leave a lot of room for interpretation. Instead, describe as concretely as possible what the pay criteria mean in practice and how they are expressed in everyday life.
6. Communicate and Embed
No matter how well thought-out the pay criteria are, they will hardly do their job if no one knows where they are or how to use them. Therefore, make sure to communicate your pay criteria and make them a natural part of everyday life - in onboarding, salary discussions, performance reviews and management forums, but also in large and small projects in the daily work.
As we have mentioned before, it is also an explicit requirement of the Pay Transparency Directive that you, as an employer, inform about pay criteria in a clear and accessible way.
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