Communication and Successful Pay Strategies
By James T. Stodd, SPHR, SHRM-SCP
March 23, 2016
A lot is being said and written these days about pay transparency and communication from a socioeconomic and regulatory perspective. However, this article is intended to address the need for better pay communication from the broader standpoint of “strategic advantage,” and how better communication regarding pay practices can help many employers better attract, retain and engage its employees.
From a purely statistical viewpoint, half of the employers out there offer competitive or better pay programs. A smaller number, perhaps as many as 25 to 30{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7}, pay well enough to maintain a significant strategic advantage over other employers. Given the costs associated with maintaining these “competitive” to “advantageous” positions, you’d think these employers would want to draw attention to their positions, and that those at the upper ends of the competitive arena would essentially be shouting it from the rafters. Yet, according to a recent PayScale report,(1) only 21{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} of all employees feel their employers adequately share information regarding their pay practices. Hmmm?
Why is it important for employers to “claim” their competitive position?
Well, the simple truth is that if employers don’t claim and explain the competitiveness of their pay practices, the tendency is for others to step-in, including skeptics and naysayers, to argue otherwise. In addition, research has consistently shown that when in doubt, people tend to overestimate the pay received by others relative to theirs. As a result, many employees are led to feel undervalued and/or to underestimate the competitiveness of their pay.
For instance, the same study referenced above showed that while 73{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} of employers believe their employees are paid fairly, 64{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} of their employees disagree, stating they believe to be paid “below average” compared to their colleagues in similar roles. Another study,(2) focusing on those who believe themselves to be underpaid, found that only 45{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} actually earn less than what employers typically pay for similar roles. That means the remaining 55{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} wrongfully believe they are underpaid, even when it simply is not true! Please note that the key word in this finding is the word “believe”, and that if employers don’t educate their employees otherwise, there is a strong tendency for pay programs to be falsely devalued.
Why is it so important for employees to understand and appreciate the value of their pay?
In addition to simple common sense, a recent study by Aon-Hewitt(3) has once again confirmed that employee morale and engagement are linked to “beliefs” regarding the competitive posture of their employer’s pay practices. Specifically, that study found that 60 percent of “engaged” employees believe that their total rewards are above, or well above, what other employers offer. Moreover, that study reported that employees who view their total rewards as “competitive” are 2.5 times more engaged than other employees. In contrast, only 24 percent of those classified as “disengaged” perceive their pay as favorably.
That same study showed that while 83{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} of employees understood their base pay, only 64{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} clearly understood their variable pay programs (including bonus programs, incentive plans and commission structures) which are of growing importance in today’s reward practices. Equally important, many of the least understood programs were also viewed by employees as the least competitive.
Finally, with a look toward retention, for the fifth year in a row the PayScale research referenced above found that the number one reason most people leave their employment is compensation. That study also noted that the majority of job changers cited “seeking higher pay elsewhere” as the primary reason for leaving.
These findings clearly establish that many companies could dramatically help themselves with employee retention and engagement by increasing awareness and understanding of their pay programs. For those who may be wary, it should be noted that doing so does not require publishing salaries or otherwise violating the confidential nature of any individual’s pay. In fact, doing so could be very counterproductive. What it does mean, however, is affirmatively talking about your organization’s approach to pay in a way that is meaningful and beneficial to both the employer and to its employees.
Here is a list of positive steps employers can take to ensure better understanding and appreciation of their pay practices:
1. Develop a written compensation philosophy statement that summarizes your strategy and approach to compensating and rewarding staff members. This statement should address all components of your formal reward system and be written to facilitate the following:
a. Ensuring that all compensation programs are fully aligned with your business strategy and desired outcomes,
b. Ensuring that a consistent system of thought and values is always applied to compensation decisions,
c. Providing a source document for other written documents and statements used in educating board members, executives, and any managers involved in compensation program decision-making,
d. Providing “talking points” for use in direct communications with employees (written or verbal) regarding compensation and pay programs.
2. Ensure that written plan documents and/or policy statements are prepared, updated, and distributed to all involved. These documents should be detailed yet simply stated, and be consistent with the employer’s stated compensation philosophy and strategy.
3. Ensure that any managers and supervisors involved in making compensation-related decisions, including periodic performance reviews, are thoroughly trained in the employer’s compensation philosophy, approach, and the particulars of all compensation plans applicable to those they supervise.
4. Conduct periodic meetings with staff members at all levels where compensation issues and topics are decidedly “on the table”. Be prepared to pro-actively state your philosophy and strategy, as well as the steps you take to ensure your compensation practices are consistent with your strategy.
5. Issue employee benefit statements that summarize the value of the “hidden paycheck” and numerically clarify the value of the “total rewards” pie (including the cost of professional development and training programs).
We believe, based upon research as well as practical experience, that taking these steps will help employers significantly improve their ability to attract, retain and engage talent. After all, people within your organization are already talking about “pay”, and most of those conversations are protected under existing laws and regulations. The question for employers is, “who is representing you in that conversation?”
1 PayScale, Escape to Comptopia: 2016 Compensation Best Practices Report, A PayScale Research Report, 2016
(see: https://hub.payscale.com/i/645228-payscales-2016-compensation-best-practices-report)
2 PayScale, The Most Underemployed Jobs, http://www.payscale.com/data-packages/underemployment/mostunderemployed-jobs
3 Aon-Hewitt, Workforce Mindset Study, Aon pic, 2015 (see: http://www.aon.com/human-capitalconsulting/thought-leadership/talent/2015-workforce-mindset-study.jsp )