While it may not come as much of a surprise—considering the national unemployment rate of 3.4% is at its lowest since 1969—employers looking to keep much-needed talent in the fold are turning to merit raise increases as a primary retention strategy, according to a recent survey. However, employers have their work cut out for them when it comes to designing and communicating about changing pay practices.
Salary.com’s Annual Pay Practices Survey found that 64% of employers polled continue to combat labor market woes with higher funding for merit increases, a full 23% increase from the prior year. Salary.com surveyed 1,012 organizations of all sizes, representing 21 industries, with responses primarily from managers and above and HR professionals.
While the survey found that most (72%) HR pros believe employees are paid fairly, only half think their current pay policies can successfully retain employees. And only a slim majority (56%) have an actual compensation philosophy, an 8% decrease from last year.
“The slight decline in the presence of compensation philosophies, while surprising given the tenor of the times, could be a result of companies revamping their pay philosophies to address the growing number of state laws requiring pay transparency,” says Chris Fusco, senior vice president of compensation at Salary.com. “We expect to see the number of compensation philosophies rise next year.”
Given the growing number of states, including California and New York, enacting pay transparency laws, more than half (56%) of organizations have a formal process in place to address compliance with equal pay laws, a percentage that Fusco also expects to see grow.
When it comes to being transparent about changing pay practices, two-thirds of those with a compensation philosophy directly communicate it to employees, while 60% of those with a compensation plan (63%) share it with the workforce. However, only one-third of employers provide actual management training on communicating with employees about compensation.
Meanwhile, less than half (46%) of HR professionals rated their organization’s employee engagement as above average; 10% rated it below average. Fusco says better communication strategies about pay could turn those numbers around.
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“This survey tells us that communication around pay is lagging, and employee engagement may be suffering because of it,” Fusco says. “Corporate leadership must address the dynamic of burgeoning pay transparency laws and a persistently tight labor market by pulling back the curtain on pay and training managers on how to have tough conversations.”
Without full transparency about how pay is determined, Fusco adds, employees will become skeptical and could be influenced by Equity Theory—based on the idea that employees are motivated by fairness—and that could add to already-high turnover rates. As an example, he says, if an employee learns that “a peer performing a similar job as them is earning more money, then they may choose to do less work, thus creating fairness in their eyes.”
“If [employers] don’t make progress [on transparency around pay practices], they could face lasting consequences.”