Compensation matters

5 practices for employers

It’s a simple reality of the world of work today that employers face tremendous pressure to improve, upgrade, and evolve their compensation planning. What’s not as simple is how to approach the issue.

Here’s how to build a total ecosystem of pay and rewards that has a logical progression and clear, transparent factors around performance, experience, skills, title, and more:

There are 5 key practices
that employers can leverage
for success...

1. Approach compensation holistically

“Compensation” itself adds up to far more than pay; the entire package of what falls into the compensation bucket is determined by an, often dizzying, array of factors. But regardless of the size and nature of the organization, compensation should always be approached as an aggregate of a broad range of elements: salary, rewards, incentives, and more.

As an organization, commit to looking at compensation as a total package. Start by doing a well-focused inventory of all the elements that go into each tier of compensation, from entry-level to the C-Suite.

Conduct comparative analyses not just in terms of numbers, but the terms of compensation — how many months on the job, for instance, until a rewards program kicks in? What level of employees are eligible for certain incentives? If employees are remote, are they being offered a different kind of compensation package than those on-site? Have changes in compensation occurred that are not reflected in long-term hires that hold the same position as new hires?

Additionally, compensation plans are increasingly being considered per individual needs — and being individually tailored per each employee’s own preferences as to what they want to go into their compensation.

Externally, compare your own compensation plan against the market. There are a number of ways to do this. You can scrutinize competitor’s listings on job portals or do targeted searches to come up with the prevailing salary range. And, of course you should be sourcing relevant benchmarking data to compare your own compensation structure against, and see where you land.

If you’re not where you need to be in terms of being competitive as an employer in your market, or if you are with certain tiers (such as upper-level management) and not others (such as employees out on the floor), it’s time to make the necessary adjustments.

3. Leverage technology and data

The most effective way to design a compensation planning system that’s fair, accurate, and will contribute to the long-term success of your organization is to lean on the power of technology and the clarity of data. We’re well into the era of the cloud — and greatly expanded digital capabilities, including the ability to amass and analyze massive pools of data, have become the new normal. Along with that comes the ability to have a single source of truth for all concerned, from managers to employees, from recruiters to candidates.

A cloud-based hub can handle and deploy the complex solutions companies need to oversee and administer best-practice compensation across any location. And it can cover the full range of functions and capabilities a modern system needs to have, such as analytics, predictions and forecasting, budgets, planning, compliance, actual payments and rewards, data-based feedback and reviews, and personalized outreach and communications.

Data is also fundamental for strategizing a means to succeed in the future, though it’s not leveraged nearly enough. While a full 69% of organizations say addressing new expectations and strategies are key for near-future success (in the next 12-18 months), only 9% are ready to address. When compensation strategies are isolated from overall business and growth objectives, it hamstrings good, tactical decision-making. But that’s not something companies can afford to do anymore.

2. Assess mission and objectives

An employer’s work culture isn’t always directly correlated to compensation, but it should be. Nothing is more reflective than pay. Despite commitments to lofty values, a people-centered, growth-centered mission; and a touching origin story; if an organization is still lagging behind in its compensation planning, those ideals are debatable. And despite established behaviors and practices around fairness and equity, they’re meaningless if contradicted by salary issues. The way an organization cares for and approaches its workforce will be either reinforced or contradicted by pay.

Even if your organization has crafted an incredible mission statement and code of conduct; even if it’s restructuring to better fit the needs of its workforce now, if that doesn’t extend to compensation, the culture will ring hollow. Employees experience their employers on a fundamental level first — which is all about how they get paid.

With that in mind, embark on an organizational soul-searching effort. Dig into your work culture and see how it lines up with your compensation practices. Scrutinize your EVP (employer value proposition): what are you really bringing to the table as far as directly, clearly valuing your employees?

Another question to ask: Is your compensation strategy actually documented? Are leaders and managers clear on where you plan to pay relative to market, how much pay is base versus variable, and how compensation is linked to performance? Do you have a clear, long-term incentive strategy for critical skills or high-potential employees? In the current dynamic environment, a clear set of guiding principles that’s understood throughout the organization is critical to avoid the unintended consequences of reactionary tactics.

Raises are a competitive necessity at this point, and they’re trending. Salary increase projections for 2022 tend to look like this (making this a year when not incorporating raises could be a long-term liability in terms of your workforce):
41% of organizations in the U.S. and Canada planned on having a higher salary increase budget for 2022 than they had in 2021.
For executives, management and professional employees, as well as support staff, U.S employers were average pay raises of 3.0% for 2022.
Companies are trying to factor inflation into their compensation, adjusting pay to keep pace. But with the inflation rate hitting 8.6% in May 2022, those adjustments may not be enough to keep employees.
Most employees expect they will see a 10.5% increase in total compensation when they switch to a new employer.

4. Commit to best and required practices

“Best” practices aren’t just aspirational ideals. They’re time-tested actions that maximize effectiveness and address new realities as the world of work evolves. In fact, you could say that it’s a best practice to pay attention to new developments in the world of work — and be able to flex and adjust to better meet expectations and needs around those new developments. In a remote workplace, for instance, it’s a best practice to do mobile deposits.

Given the needs of today’s multigenerational, diverse workforce, it’s also a best practice to personalize employee compensation and create choices around benefits, such as retirement accounts and school loan programs. It’s also a best practice to engage first-level managers to provide input on compensation for their employees, using multiple data elements to avoid bias and ensure employees are rewarded appropriately. Engaging managers in the process creates a sense of agency in the decision, and helps build the manager/employee relationship and reinforce the organizational culture.

Including pay equity

In some cases, these best practices have also become basic requirements. New regulations and legislation mandate that employers take up the gauntlet on pay equity. But pay gaps still exist, from gender pay gaps to inequities along racial lines.

On average, in the U.S., for instance, women are still being paid 82 cents to every dollar a man earns — and this hasn’t changed between 2021 and 2022. For Black women, it’s 79 cents. For Hispanic women, it’s 78 cents. For Native American women, it’s only 71 cents.

In the EU, working women earn 13% less on average than working men for doing the same job. It’s estimated that it will take East Asia and the Pacific another 168 years to close the region’s gender pay gap.

The best way to assess pay equity in your own organization is conducting periodic reviews. A July 2021 survey of 1,094 HR professionals found that nearly 58% of their organizations voluntarily conduct pay equity reviews to identify possible pay differences among employees performing similar work that cannot be explained by job-related factors.

Similarly, two thirds (66%) of organizations polled in late 2021 to early 2022 said their planned initiatives for 2022 included pay equity analyses — 20% more than the year before. More than half (52%) were planning to conduct gender- or race-based pay equity analysis for the first time.

While formal, statistically rigorous pay equity analyses are critical, it is also helpful for your core compensation planning tools to share various pay equity indicators during the actual review process.

This can minimize the need to modify results after the process is complete — a step that can create negative perceptions about pay equity initiatives. In the broadest sense, equity applies to everyone — equity within a team, equity within a function, equity with the market, and of course, equity among different genders or races.

The result of such efforts isn’t just information or, in some cases, moving into compliance with new regulations.

In terms of employee morale, it’s invaluable. While improving pay equity in itself can have a transformative effect on workforce engagement, retention, making the commitment and following through with efforts greatly improves employee perceptions around the issue. And that, in turn, can build confidence across the workforce that their compensation decisions are being approached from a position of fairness.

5. Commit to transparency

Transparency is a lot more than just providing information and leaving it at that. It’s a thru-line of data-informed decisions, clear communication and honest conversations. It means sharing the process, explanations and context that empower employees with clarity and understanding.

In a recent global survey across seven countries on pay transparency:

70% of employees believe salary transparency is important to employee satisfaction.
69% wish they had a better understanding of what fair pay is for their position and skill set at their company and in their local market.
Only 36% say their companies disclose salaries internationally.
Less women than men feel they have a good understanding
of how their company determines salary:
• Globally: 59% of men vs. 51% of women
• In the U.S.: 65% of men vs. 53% of women
• In Germany: 48% of men vs. 38% of women

Pay transparency is critical to building connection, confidence and trust — and nothing helps allay a sense of bias more. But considering how essential pay and compensation are in terms of employee experience, many organizations are missing the mark.

Only 35% of HR professionals report that their company has a policy about pay transparency. One possible reason: there’s neither the technology nor the data in place to provide a systematic, clear picture — not only for employees, but for the decision makers and managers themselves. Yet a pay transparency program needn’t be complicated. If it’s relying on that clear and single source of truth, the connection is already made. Build on that with 4 highly effective and simple strategies:

Communicate compensation with clarity
Use uniform and fair criteria
Convey a true sense of compensation’s value to employees
Have transparent pay conversations, whether in-person or remote.

Compensation professionals know that it is unlikely for employees to ever feel that they’re paid enough. Few organizations have the financial resources to instantly align pay with their desired market position or fully mitigate cost-of-living increases in an inflationary environment. But transparent conversations, driven down to first-level managers, can help demonstrate commitment to employees — and eliminate the damage caused by lack of trust.