Determining fair compensation for employees is one of the great enigmas of the HR world: Get it right and employees are happy. Get it wrong, and critical metrics such as employee-retention and engagement rates could take a nosedive, which could then lead to bottom-line woes.
With that in mind, employers should take special note of a recent survey from PayScale, the Seattle-based compensation-data provider, which found that employers and managers are far from being on the same page with employees—or each other—when it comes to compensation. Yet, even with the perception disparities uncovered in the survey, experts say there are some best practices employers can utilize to close that perception gap.
PayScale’s 2018 Compensation Best Practices Report is based on input from 7,100 employers and found a deep disconnect between managers and HR departments. Specifically, while 85 percent of managers “agree” or “strongly agree” that they feel confident in their ability to explain the rationale behind pay decisions to employees, only 37 percent of HR organizations share that confidence in their own managers.
Confusion also seems to reign when it comes to pay fairness: While 67 percent of managers polled believe their employees are paid fairly, only 21 percent of employees agree.
Clearly, there is more work to be done when it comes to communicating about pay, experts say.
“More and more employers are realizing that when employees feel good about their deal, it has a positive impact on the bottom line,” says PayScale’s Lydia Frank, vice president of content strategy. As a result, having conversations about pay is a crucial best practice because they deliver an opportunity for employers to build trusting relationships and show employees how valued they are, she says.
“Yet, it appears many managers are unable to fully articulate how pay was determined, leaving employees feeling disconnected and dissatisfied,” Frank says.
Most employers in the survey placed retention high on their list of worries, as 60 percent of them report being “very concerned” about employee retention as 2018 unfolds. Yet, 73 percent of employers estimate the average raise in 2018 won’t differ much from 2017, holding steady at 3 percent or less—which could hurt retention efforts.
“There’s this crisis of confidence in terms of having faith that their managers can talk about paying employees,” Frank says. “For many years, compensation has been something you don’t discuss openly; it’s been something that organizations hold closely to the vest. Now, we are in this new world where there’s a lot of push for pay transparency and people talk more openly about it.
“The obvious risk,” she adds, “is people will create their own narrative if they don’t have the right information.”
When it comes to conversations about compensation and trust, many organizations are starting to see the value in communicating a more holistic value proposition that goes beyond direct compensation, says Mary Ann Sardone, a partner at Mercer and the North America workforce rewards practice leader.
“Increasingly, employees desire a broader array of reward programs to support their health, wealth and careers,” she says. “As a result, managers need to be prepared to go beyond discussing compensation alone and include the other investments being made by the company, like retirement and career opportunities. Otherwise a lot of the value proposition is being left on the table.”
The recent corporate tax cuts—as well as a current focus on equity in the workplace—are helping to shine a spotlight on compensation inequities, she says.
Although most managers would like to have more autonomy in pay decisions, Sardone says, many organizations remain hesitant to turn over the reins due to a history of “centralized control” as it relates to compensation. But, she adds, more employers are starting to feel the pull from line management to “own” compensation and its outcomes, as line managers and business leaders are increasingly asking to play a larger role in any pay decisions by using the organization’s compensation tools and information.
“I think this explains that manager/employer disconnect in the survey,” Sardone says. “With more information and technology, compensation professionals’ role will shift to advising and analyzing information to equip managers to make informed decisions.”
Sandra McLellan, North America rewards practice leader at Willis Towers Watson, agrees that a more holistic approach is warranted. She says that segmentation via what she calls a “total rewards lens” is more important than ever because base salary does not sit out on its own as a retention driver. Employees stay with an organization for many reasons, she says, including the culture, the career opportunities and the combination of rewards elements that resonate for them.
According to the Willis Towers Watson 2016 Talent Management and Reward and Global Workforce reports, in fact, managers are more likely to consider a wider range of factors in determining a base salary increase. Where program guidelines tended to focus on performance rating or achievement of last year’s results, managers surveyed strongly reported factors such as achievement of team goals (66 percent), possession of critical skills (63 percent) and future potential (59 percent) as criteria used when making salary-increase recommendations.
“This gap between what managers value and how programs are designed might explain perceptions of manager capability to represent pay-for-performance programs,” she says. “In fact, as many of our clients rethink performance management and pay-for-performance, this broader definition of performance is often an evolution. Taking a user-centric approach to program design that involves managers can help to close the divide.”
In the end, workers today know what they’re worth far better than they may have a decade ago, thanks to greater access to market data, and understand at least some idea about what a specific position is generally paid, says Frank.
“[Compensation] used to be more of a black box for where employees weren’t really sure, and it was really discouraged to talk about it, and so they kind of just had to go on faith that their organizations were right by them,” Frank says. “But that’s not the world we live in anymore. Communications around pay must be uncomplicated and honest. You can throw a lot of words at people, but if they are not backed up by action, it’s going to fall flat.”