The Big Shifts: Personalization, Pay Transparency, and Performance-Based Compensation

Not only has work gone through a major transformation, so has compensation. Organizations need to pay attention — and that means focusing on three big shifts steering the course of compensation strategies. These are game-changers when it comes to compensation planning. Keep these top of mind, as they reflect global changes in what employees expect from their employers.

Personalization

Compensation for today and tomorrow’s workforce is no longer a matter of one-size-fits-all. It’s a best practice now to harness the power and scope of personalization when determining pay increases.

For one thing, employees expect more. They want to know they’re not just a cog in the wheel and they’re more than a number or a data point. They want to feel like their particular contribution and trajectory is being considered by those deciding their compensation, and they’re not just a victim of circumstances.

For compensation teams and managers, a personalized process can accommodate far more factors. It unlocks pay decisions from the confines of a merit matrix — the traditional step up from applying the same criteria across the board. It replaces the merit matrix’s mathematical formula and spreadsheet approach with something far more sophisticated and flexible; a multidimensional approach that’s far richer in terms of data and variables.

From a manager’s point of view, personalization gives them far more to work with. Depending on how much discretion they’re given, they can tailor compensation based on an individual employee’s history — for instance, if they have been a consistently high performer. Or they can factor in their position on their team.

What personalization provides is information that offers a holistic picture, enabling them not just to determine base pay, but all the other facets, such as a bonus, a short term incentive, and a raise. Personalization provides the context and the guidance with which managers can take ownership of their decisions.

How to approach compensation with personalization: 7 smart steps

1	Go holistic – Get beyond the merit matrix, and pull as many “levers” as possible when it comes to personalizing compensation, including budget, bonus, STI (short term incentive), LTI (long term incentive) programs, and the value of TR (total rewards).
2	Work in real time – Run live calculations of position and range to get the most accurate information in real time — and don’t wait until the annual review to see the impact on your workforce budget.
3	Ensure alignment – Use compensation software to determine and ensure salaries of new hires are aligned.
4	Customize views – Customize views to show individual historical data around performance. (With a workforce where you have at least 20–30 people or more in a specific role, customize views by role to get a holistic view of compensation.)
5	Consider the market – Factor in market adjustments separate from merit increases or promotions.
6	Keep improving – Keep refining based on the manager and employee digital experience. Continue to adjust how personalization is communicated and presented — which is, in itself, part of the overall trend towards a personalized approach.
7	Get compensation and performance functions on the same page – Make sure all stakeholders are working from one source. Talent and compensation teams, finance, HR, business partners and leadership all need to have the same information, the same data, and a shared understanding of the strategy.

Pay Transparency

While many leaders have been hearing the term “transparency” so much that it may be losing some of its impact, pay transparency is a critical factor that HR and compensation teams can’t lose sight of.

Employees aren’t the only ones calling for pay transparency, either: as many organizations know, pay transparency is being built into legislation and regulations all around the globe. The goal is the same: to promote real pay equity and reduce bias, and to address the increasing visibility of other people’s salaries and benefits with a solid process.

Among the regulations employers are seeing:

Salary range now required to be included in all job descriptions, such as in new legislation in the UK.
Salary history questions posed to candidates are no longer allowed, as legislated by 26 states in the U.S. including Washington, Illinois, California and New York, as of October, 2022.
Pay gap reporting mandates, as has been proposed in New Zealand.

These changes — part of a growing tide of focus on pay transparency — are going to have enormous impacts on organizations across the hiring and employee life cycles. Organizations that overlook them may face costly ramifications, from fines to employer reputation damage to employees who leave.

This isn’t just something you need to consider in the state you’re headquartered in. Given the global economy, it’s highly likely you may have a footprint somewhere with pay transparency requirements and will have to ensure you’re in compliance — otherwise you could put your business as well as your employer brand at risk.

How to build pay transparency into your compensation planning: 3 must-do’s

1	Be up front – Employees are savvy and don’t want to be a part of companies using old, opaque methods for compensation planning. They will find out what peers and coworkers are making — and the benefits they’re receiving — whether or not you provide that information. Better to be up front and provide accurate information than have to deal with speculation and rumors and the fallout they can create.
2	Think holistically – It may be tempting to just follow compliance to the letter — but the letter only. But taking a nearsighted approach may mean you fall short of new requirements in the span of a year, and are caught short by the dynamics and consequences of salary range listings. There will be a ripple effect to putting salary ranges in new postings. As a for-instance: consider the conversations that happen between a manager and employee. The manager may say one thing, the employee sees another. Decisions need to be based on factual evidence – taking into account the employee’s performance, peers in equal and/or similar roles, and ideally also the going market rate for a particular role. Bringing this consolidated insight to the attention of line managers enables them to have a constructive, fact-based conversation with each of their direct reports. Don’t underestimate the impact of an employee finding out how their compensation compares to their peers, or their earning potential if they were to work for one of your competitors.
3	Get ahead with good planning – Visibility increases competition across markets. It can also create misunderstanding amongst the workforce. Give HR teams the digital tools to integrate data into their planning. Use automation, benchmarking and AI, and share the right criteria with managers so they can share it with employees. Visibility needs to be approached with a commitment to clarity and good decision-making based on data. Make sure your managers know how to customize views to reflect all the factors in compensation so they can be shared with — and understood by — employees.

Performance-Based Compensation

As a more holistic way to approach pay, performance-based compensation is becoming a vital part of many organizational strategies to increase motivation and retention. What makes all the difference is how it’s done.

Performance-based pay is often calibrated to how well employees meet or exceed certain goals. When employees feel the process of determining who gets it is fair and equitable — and the goalposts don’t move — the approach can indeed drive better performance, and deepen a sense of alignment with the company’s success. But it’s critical to get it right.

That requires careful calibration around the right factors, using the right data, considering the good of the team as well as the good of the individual, and ensuring that pay and HR/ performance functions are all working together.

How to leverage performance-based compensation — 3 key strategies

1	Establish a continuous performance process – The annual performance review doesn't work. Employers need to be able to drive ongoing conversations, and compensation needs to be done periodically to ensure the investment is allocated optimally across the organization. Foster performance conversations throughout the year that are focused on employee development, but use a combination of metrics and a performance summary to guide compensation annually or bi-annually.
2	Drive clarity and objectivity into performance results – Employees should understand clearly how they are being evaluated so the impact to pay is not viewed as arbitrary. Be clear on how much performance is based on metrics, demonstrated skills, or business outcomes, and minimize soft or subjective assessments of performance
3	Differentiate compensation based on performance – Many managers dilute the impact of performance conversations by spreading compensation too evenly across the organization. This de-motivates high performers and sends mixed messages to employees who need to improve skills or results.