Compensation and pay transparency
Compensation
and pay transparency
Introduction
Compensation
communication is too often an afterthought in many organizations. The resulting
mystery surrounding compensation and total rewards can lead employees to
perceive that your compensation practices are unfair, not industry-competitive,
nor in their best interests. Of course, it doesn’t have to be this way.
Transparent and effective compensation communication can build trust. It can
help your employees understand your organization’s compensation philosophies,
policies and processes – and how these relate to their personal status as an
employee. Perhaps even more important is that employees who understand their
compensation are more likely to be loyal to the company.
The idea
behind creating a compensation communication plan is to make sure employees are
aware of the benefits they are eligible for and build trust in the
organization. This helps your team feel valued and, in turn, makes them more
likely to stay loyal to the company.
What is
pay transparency?
Leon Lam, et
al. (2022) defines “Pay transparency refers to a pay communications policy in
which a company voluntarily provides pay-related information to employees — for
example, about the process of the pay system (process transparency) and actual
pay levels or ranges (outcome transparency), or even an open policy for
employees to freely share information about their pay (communications
transparency).”
Although pay
transparency is typically an enterprise-level decision, once pay information is
actually made transparent, it’s the employee’s immediate supervisor who, as
their first point of contact, is often left to deal with the potential fallout.
They’re the ones responsible for providing disgruntled employees with the justification
for visible pay differentials and responding to their requests for raises in
order to address them.
Employees
respond to transparency-induced pay compression by seeking alternative ways to
receive the reward they feel is due to them. If a reduced pay range reduces the
likelihood of securing these rewards in the form of a pay increase, employees
may solicit other forms of less-visible remuneration from their bosses.
Interestingly
enough, not only was transparency-induced pay compression likely to drive
employee requests for i-deals, but these requests were also more likely to be
granted by supervisors. This is actually not surprising, as by doing so,
supervisors are able to:
a) maintain or
maximize team performance and reduce the risk of losing key talent due to pay
dissatisfaction while
b) ensuring that —
despite the transparency of pay — these reward “deals” remain out of the
limelight. Supervisors are, after all, responsible for managing teams of
employees, which includes motivating them and ensuring their performance and
satisfaction.
According to
the US, federal law, pay transparency is the degree to which employers are open
about salary and pay information. Salary transparency can also mean the ease at
which employees can find out the compensation of other employees in their
workplace. Also the EU parliament has approved a proposal for pay transparency
and has begun negotiations with member states. This new ruling demands that
companies with at least 50 employees must disclose information making it easier
for employees to compare salaries and expose existing gender pay gaps. While,
there is no legal requirement in the UK or Ireland and many other countries for
companies to be transparent about pay. Additionally, the UK’s Equality Act 2010
made it unlawful for companies to prevent employees from having discussions
with one another to establish whether there are differences in pay. Although
employers can ask workers to keep income confidential from people outside the
workplace.
It’s a fact
that all pay isn’t equal. So, to help address pay inequities in the workplace
and work toward equal pay, the practice of pay transparency has emerged.
Pay
transparency is about more than sharing raw numbers. Instead, it’s about
telling the story of your compensation practices so employees and candidates
understand their pay within the broader context of your workforce and the
market. Ideally, this takes the form of sharing pay ranges—not individual
salaries—with employees. Pay transparency doesn’t mean that every employee must
know what every other employee earns; rather, it means employers provide an
understanding of pay decisions and compensation ranges at each level.
Perception
is Reality
According to
The Harvard Business Review, worker perception affects their engagement,
satisfaction, and ultimately, loyalty. And in many other studies and reports,
it has been shown that most workers perceive they are being paid below market
rate regardless of whether this is true or not. The perception that pay is too
low makes the employee feel undervalued and underappreciated. This, of course,
leads to job dissatisfaction, lack of motivation, and a desire to seek greener
pastures elsewhere.
On the other
hand, using a well-designed and employee-focused compensation communication program
can play a large role in correcting misperceptions about compensation and total
rewards.
Most
employees had no idea what the pay would be for their most recent role. And
once in position, income continues to be a mystery, with just a few employees know
their company pay ranges internally.
Talking
about pay can feel uncomfortable, but job seekers and employees are hungry for
compensation information. Breaking the taboo around discussing salaries helps
businesses address pay equality in the workplace. It can also increase employee
engagement, stronger company culture, deliver a broader pool of talent and
boost business performance.
Benefits
of pay transparency
Whether
employees talk among themselves about pay or approach managers directly to ask about
their comp, it’s natural for them to seek transparency in how they are paid.
But these days, compensation transparency isn’t just about meeting employee
needs for clarity. Pay transparency is also increasingly becoming mandated at
the some governmental level. Moreover, your company’s investors and other
critical stakeholders may be interested in how you communicate your comp
practices to candidates and employees. By removing compensation secrecy,
employers can address potential pay gaps and ensure equal pay for equal work.
Salary transparency empowers job seekers and employees to understand better
what fair pay looks like for their experience and skills. In addition,
employers see the benefits of a more productive and engaged workforce.
Compensation
transparency impacts every stage of the employment cycle, from job listings to
employee retention. Eliminating compensation secrecy is beneficial to job
hunters, employees and employers. Therefore, compensation transparency holds
employers accountable for their actions, resulting in better on-the-job
performance from their team and a more equitable workplace.
Employers
with clear pay structures and compensation policy also make it easier for job
hunters to know that their skills are worth. Listing a ‘competitive salary’ is
too vague. Spending time interviewing for a role that is nowhere near the
salary the job hunter wants will leave both the candidate and hiring manager
frustrated.
Creating an
open culture allows employees to feel valued, fairly compensated and motivated
to bring their whole selves to work. Companies who practice transparency see
long-lasting boosts in productivity and increased job satisfaction amongst
workers also compensation and pay transparency demonstrates a company’s
commitment to equality and inclusion and holds the employer accountable for
their actions.
Compensation
and pay transparency demonstrate financial planning abilities that build trust
with executive team and board of directors. The headcount plan is the financial
plan in most companies. Given that compensation is considered as the company’s
major expense, investors and board members naturally want to understand how HR
manage that expense transparently. By
operating a transparent compensation program—inclusive of a compensation
philosophy and clear pay structures—HR can keep key stakeholders informed about
company’s strategy for navigating economic uncertainty with an informed,
data-driven approach to the largest area of the business' spend.
When
companies have a compensation strategy that aligns with well-defined pay ranges
and competitive market data, pay negotiations become less necessary. And if
they clearly communicate their compensation strategy to candidates and
employees, company may be able to limit or even eliminate salary negotiations.
Instead of
operating by exception and creating individual deals, company can make pay
decisions that align with its compensation plan. That way, company can make
efficient compensation offers and keep pay consistent across job levels.
Compensation
transparency requires a thoughtful approach and a commitment to treating
compensation as data-driven science, not just a set of decisions based on gut
feelings or guesswork. By committing to increasing transparency in company pay
practices, the company should also committed to finding reliable benchmark
data, establishing a compensation philosophy, and creates the salary bands,
which plan to communicate to employees.
The
Impact of Compensation Communication on Employee Retention
The new
generation employees have many options for where they can work. As a result,
organizations across just about every industry face high turnover. When one
employee leaves, especially during good economic times, another employee must
be hired. This requires effort to locate and recruit the replacement. And that
effort doesn’t come cheaply. It has been estimated that in most organizations,
the cost of turnover – including recruiting, hiring, onboarding and training –
averages 1.5 to two times the position’s salary. And because a great deal of
turnover is due to misperceptions about individual compensation compared to
market, that cost is often avoidable. This can be especially critical in a
tight labor market. When unemployment is low, available replacement talent may
be scarce – and costly. In fact, when it costs more to attract and hire new
workers, you might also need to increase salaries across-the-board to keep
current employees in balance with market conditions.
But again,
proper compensation communication can be key to bridging the gap between
misperception and reality; and to keeping valued employees on the job so
recruitment of replacements is unnecessary.
Using
Compensation Communication Effectively
Using
compensation communication to correct misperceptions and improve retention is
relatively simple, with two primary parts: 1) communicating proactively to all
employees about compensation programs, and 2) communicating responsively and
respectfully to individual employee concerns.
In general,
the following are important aspects of an effective compensation communication
program:
Making
compensation communication a carefully crafted and thoughtfully implemented
part of company’s overall compensation program design. Educate employees about
the bigger picture beyond the corporate walls by sharing the results of any
recent Market Rate Analysis so employees know where they stand. If your
workforce lags the marketplace, explain why or correct the inequity.
Being
sensitive to the concerns and perceptions of individual employees. Encourage
them to share their compensation concerns with management. When they do, truly
listen, ask questions for complete understanding, and then research and respond
in a timely manner.
Compensation
and pay Transparency levels
1. Prerequisites
for Level 1 Transparency
Level 1 transparency means that employees find out what they get paid on
their paycheck. Conversation about pay is very limited if it happens at all.
“Go ask HR” is a familiar refrain.
At the risk of sounding flip, the prerequisites for level 1 transparency
are that company has employees and provides them with pay either by check or
direct deposit. Level 1 is one very extreme end of the spectrum, and is a
missed opportunity to talk with people about what’s working, job expectations,
development opportunities and more.
2. Prerequisites
for Level 2 Transparency
Level 2 transparency means that organizations get market data or do a
limited study on some of their positions. They may share some of their high-level
strategy or results with employees, but there is limited sharing about data for
their specific job.
In order to share information at level 2, the organization needs the
following:
· Market data for
some or all jobs.
· A basic
compensation strategy that, at the very least, helps them select appropriate
market data and percentile. For example: we compete with organizations that are
about our size, in our geographic area and industry. We’re looking at the 75th
percentile of that data.
o
Use of reliable comp benchmarking data based on
information reported by employers, not employees. HR can also benefit from
using compensation software that:
§ Automates pay
range creation.
§ Refreshes
benchmark data quarterly (or more often).
§ Allows you to
filter data, making it easier to compare the roles in your company with the
same roles in other high-growth companies.
§ Empowers you to
model scenarios, develop headcount plans, and surface insights about the best
path forward with fresh, reliable data.
§ Offers
diversity, equity, and inclusion (DEI) evaluation tools to help you monitor pay
equity on an ongoing basis.
· A desire to
share some information about compensation decisions with employees and
managers.
3. Prerequisites
for Level 3 Transparency
Level 3 transparency means that organizations have a compensation plan
(philosophy, strategy and ranges). They share at least the employees pay range
with them. They may share more than just the pay range, such as the philosophy
or strategy. Employees learn where their pay falls relative to the range and
also get a sense of movement (in the upwards direction).
At this level company communicates a statement that explains how the
company approach compensation and tie all pay decisions to that philosophy. If
company follow its comp philosophy consistently, employees will trust that the
company’s program is fair and equitable.
In addition, in order to be at level 3 transparency, the organization
needs to:
· Have a clear
strategy for compensation. That covers both the high level intention with regard
to compensation as well as a plan to execute against the philosophy.
· Have establish a
meticulous job evaluation methodology and practice.
· Have training
for managers, supervisors and employees’ representatives on job evaluation
methodology and their roles in the job evaluation scheme.
· Have involved
employees representatives and managers in job evaluation scheme
· Have at least
job-based pay ranges, a min-mid-max for each job. They may also have
grade-based ranges, where multiple ranges are arranged mathematically and jobs
are assigned to grades.
· Have training
for managers to help them understand compensation basics as well as how to have
effective conversations about pay. While managers may not be the ones sharing
compensation information at a level 3 transparency, they will likely have to
field questions from employees about pay.
4. Prerequisites
for Level 4 Transparency
Level 4 transparency means that organizations use compensation to
reinforce and amplify their culture, aligning their talent strategy to business
objectives. The “why” or rationale for pay decisions is discussed more openly
at this point.
To accomplish level 4 transparency successfully, organizations likely:
· Have a clear
compensation plan including philosophy, strategy, ranges, policies and
processes in place. The strategy is probably slightly more complex, in that
it’s not a one-size-fits-all strategy applied to the whole organization. To
succeed in today’s economy, organizations often have to make tough choices
about their priorities; the compensation strategy drives those choices.
· Educate
employees about pay ranges and opportunities to elevate their pay within their
job range. Some companies share information about the current pay range and the
one above so that employees can see the potential trajectory of their pay over
time.
· Provide more
in-depth training for managers to have difficult conversations about pay.
· Have talking
points for managers for both key compensation decisions (Why do we use a
different market for that function? Why do we target higher for those jobs?)
and specific compensation conversations (Why are you freezing my pay? Why
aren’t I getting a larger increase? Why won’t you match pay for this report I
found online?).
· Are able to
connect the dots between cultural values and compensation decisions. They can
articulate the connection, and they have consistency between values and
choices. For example, if they celebrate that they’re a fast-paced organization,
they examine pay frequently. If they have an open-door policy, they are also
transparent about pay decisions. If they believe their employees are their most
valuable asset, they pay employees fairly.
· Have a
commitment from executives and a dedication to transparency of decision-making.
· Make the
performance-reward link clear and objective.
Ultimately, to accomplish
level 4 transparency, organizations need to have their ducks in a row. The more
transparent they are, the more they need to be able to rely on sound
decision-making and consistent choices. One note on consistency: the
implication is not that all employees be paid the same, but that all employees
have the same rules apply to them.
5. Prerequisites
for Level 5 transparency
Level 5 transparency is the other extreme on the spectrum. At this point,
both pay decisions and pay itself are transparent. Some call this radical
transparency, while for others, it’s just a natural extension of their
organizational culture. Some level 5 organizations publish pay internally, some
externally.
To be at level 5 transparency, organizations would need all of the above
plus the desire to have everything visible. Level 5 transparency, when chosen,
is a statement. That said, when organizations choose level 5 transparency, they
still have watch for the common pay challenges: compression, equity, range
outliers. Transparency itself is not a panacea for pay issues.
Reference
Compensation
Sense: Why Compensation Communication is So Important in a Tight Labor Market
The Impact
of Salary Transparency and Performance-Based Evaluations
Readiness
Checklist: How Do You Know the Right Level of Pay Transparency for Your Org?
https://www.payscale.com/compensation-trends/readiness-checklist-know-right-level-transparency-org/
Understanding pay transparency: 5 reasons to start talking money
https://www.betterup.com/blog/pay-transparency
Leon Lam, Bonnie Hayden Cheng, Peter Bamberger, and Man-Nok Wong (2022) Research:
The Unintended Consequences of Pay Transparency, HBR, https://hbr.org/2022/08/research-the-unintended-consequences-of-pay-transparency
Trotter, ذRichard G.
(2017) The new age of pay transparency, http://dx.doi.org/10.1016/j.bushor.2017.03.011
Rousseau Denise (2005) I-deals: Idiosyncratic Deals Employees Bargain for
Themselves, Routledge
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