The Compensation Mystery

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Vaso Perimenis
12/02/2020

Compensation mystery

Have you ever wondered how your salary is determined? Do Compensation departments use sophisticated formulas and algorithms to determine base pay? Or does the squeaky wheel get the grease?

The Cost

Companies can spend 40 to 60% of their annual operating expenses on pay and benefits. Yet, despite the heavy investment, many companies fall short in effectively communicating compensation programs. The most elegantly designed compensation arrangements will not achieve their desired results unless employees and managers understand and ultimately buy into the program.

Compensation can either be a powerful motivator or de-motivator, depending on how it is used and understood. Despite the importance of ensuring proper understanding of compensation programs, there are various reasons many companies don’t communicate. Perhaps the pay and benefit plans are not designed properly, so communicating them would result in confusion or dissension among employees. Other companies with well-designed plans choose secrecy because that is a reflection of the culture. But culture is shaped by conscious choices of leadership, which can either perpetuate an antiquated mentality or transform to a different mindset. 

In today’s competitive business environment, companies are changing their way of thinking. There is a cornucopia of reasons companies communicate with their employees. Leadership should adopt a more transparent philosophy regarding communication of total compensation throughout their organizations.  A company should be willing to invest a small percentage of its total wages and benefits to design a comprehensive communication plan.   

Compensation information is no longer controlled by Human Resources. Websites like Indeed, Salary.com, and LinkedIn have made it exceptionally easy for employees to develop their own perceptions about fair compensation for their jobs. A story emerges about pay transparency, regardless of what the company chooses to communicate. 

READ: HR and the Gig Talent Economy 

At Whole Foods, CEO John Mackey thinks of “wage transparency” as a source of motivation for employees. The average pay of professional titles of employees is published on the Whole Foods website. In addition to acting as an incentive, Mackey says wage transparency has another important purpose: You can fix mistakes.

Mercer’s “2019 Global Talent Trends Study” found that many employees would leave for better pay, and a large gap in the understanding within HR of the role of compensation in their decision. The study raises important questions about pay transparency. Organizations that want to resolve this discrepancy of perception should start with communication.   

The Solution

There are four steps to develop and deploy a thoughtful and robust communication strategy: Define the Objective, Collect the Data, Develop the Strategy, and Execute/Communicate.

Define the Objective

What does the company hope to accomplish through communication? Once top leadership is on board with the new compensation system, there are two basic objectives that can apply to most plans:

  1. Ensure employees fully understand all the components of the new compensation system.
  2. Motivate and retain talent

Collect the Data

The next step is to collect data and information from leaders and employees regarding their current perceptions and understanding of the compensation programs. Assessing employee attitude indicates that an organization cares about what and how they think. I have facilitated comprehensive reviews of the employee pay systems for several clients. All of these reviews are designed to provide extensive employee participation to:

  1. Improve employee understanding of pay issues
  2. Develop a sense of involvement in any review and changes.

We invite a significant volume and cross section of employees to participate in the discussions. Data collection uses questionnaires, interviews and focus groups with managers and staff representing each operating unit of the company.

Develop the Strategy

After information on attitudes and perceptions is collected and analyzed, the next step is to develop a communication strategy within the framework of the defined objectives. For example, if the results of the analysis result in top leadership’s decision to overhaul the compensation philosophy and system, that overhaul requires a specific communication strategy which can include a project team complete with line managers, ongoing communication with employees and training for managers. Determine the best channels of communication, such as videos, brochures, town halls, and communication toolkits, to name a few.

Execute/Communicate

The last step is to deploy the communication plan. It is important to articulate a unifying message based on the goals of the compensation system. Employees must see a connection between the work they do and their compensation, and the communication strategy should emphasize what pay-for-performance means and why the company adopted it as part of the compensation philosophy.

Don’t forget to follow-up! Four to six months after communication begins, measure employee perceptions using the same techniques; questionnaires, focus group etc. Hard wire the collection of feedback and understanding as part of your compensation program. One solution from a prior client included the creation of a Compensation Committee comprised of line management to increase their involvement in pay decisions. The committee’s ongoing objectives included:

  1. Recommendation and review of new and revised policies.
  2. Review market data collected and analysis of the results.
  3. Review of current salary administration programs.
  4. Act as advocates and help communication efforts.
  5. Provide feedback related to problem areas and issues

Today’s organizations cannot stay silent regarding their compensation programs, policies and philosophies. The tight labor market makes communicating pay practices an important part of a larger people strategy. Guiding leaders to have meaningful dialogue about something as fundamental as pay can only lead to a more trusting and open work environment.

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