Why Increasing Pay Isn’t Always the Answer

In my time as a Compensation Professional at PayScale, I’ve helped more than 75 organizations develop a compensation strategy to suit their needs and spoke with hundreds of companies about the challenges they face regarding compensation. Time and time again, the top two challenges I hear are that they don’t have a compensation structure in place and/or they have employees who feel they are underpaid.
Instead of automatically giving increases in response to employee complaints, our first step is to get more information by benchmarking their positions and taking a look at the market data. The surprising thing is, in many cases, we discover that employees who are complaining about pay aren’t necessarily underpaid.

The truth is that employees’ perceptions of pay may not always be accurate. In a recent PayScale survey of 71,000 people, 64% of employees who are actually paid at market believe they are paid below market and 35% of employees who are actually paid above market still believe they are paid below.

For HR professionals and managers, this is almost more frustrating than finding out pay is below the market. If your organization’s pay practices are actually competitive, but employees feel they’re underpaid, what do you do? Communication is key. It’s a good idea to take a closer look at how your organization is talking (or not talking) about compensation.

When I ask organizations about their compensation communication plan, this can bring up a lot of anxiety: Isn’t talking about pay taboo? We’re not ready to share salary information with employees and tell them what everyone is making. Won’t knowing more about pay create more conflict?

The challenge is that even if you’re not talking about pay, employees probably are, so we need to focus on getting the messaging right.
Perceptions about pay practices influence employee engagement and job satisfaction, which ultimately impacts the bottom line. PayScale’s survey also highlighted a second point that employee perceptions about pay play a significant role in an employee’s desire to leave your company. Finding and retaining top talent is crucial to achieving your organizational goals—it’s vital to not only get competitive pay practices in place, but to let employees know what’s happening behind-the-scenes.

When it comes to talking about compensation, it isn’t all or nothing. At PayScale, we think about transparency as a spectrum starting with Level One where employees only know their own pay all the way to Level Seven where everybody knows everyone else’s salary. Where does your organization currently fall?

PayScale Pay Transparency Spectrum

Image Source: PayScale 2016 Compensation Managers Training Presentation

Every organization is different and I wouldn’t recommend Level Seven to everyone. Most organizations try to fall somewhere between a Four and Six and choose to share specific details about their market study, how they developed their pay practices, share some grades and ranges or possibly their entire compensation structure, and ensure their managers are equipped to talk about compensation.

If your organization currently falls somewhere lower on the spectrum than where you’d like to be, here are four things you can do immediately to increase pay transparency in your organization:

#1 – Develop a compensation philosophy and share this organization-wide.

  • Your compensation philosophy is a high-level view on what you are trying to accomplish with your compensation dollars and answers the question of why you have a compensation plan in the first place.
  • It might say something like “The philosophy behind our compensation program is to create a program that supports our organization’s mission and values and is designed to attract, retain, and motivate employees.”
  • The philosophy statement should also address what you plan to reward with compensation (performance, tenure, acquisition of skills, etc.).

#2 – Develop your compensation strategy and share with employees how you define your market.

  • Your compensation strategy defines the market in which you compete for talent and how competitively you want to pay in relation to this market.
  • For example, if you’re a 50-person IT company in Tacoma, Washington, but you compete with larger organizations in Seattle, you might choose to share with your employees that your compensation strategy is to pay similar to a 1,000-person IT company in Seattle, Washington.
  • By meeting this market, you’re actually paying your employees more competitively because you value your talent and this is a great message to send! This lets employees know that you’re thinking strategically about compensation and there is some rhyme and reason to how pay is handled.

#3 – Perform a market study to find out how your organization compares to the market and share this with employees.

  • Once you have your market and compensation strategy defined, the next step is to benchmark your jobs and see how your pay practices stack up. You may choose to develop ranges at this point (or ensure that an existing structure is aligned to the market), but having the market data will at least give you a sense of how competitively you pay as an organization.
  • If you’ve conducted a market study, be sure to share this with your employees! Let them know that you analyzed the markets where you compete for talent, developed a competitive market strategy, and benchmarked your jobs. You may choose to stop the conversation there, or perhaps share more details about the results, including areas of the organization that are currently lagging the market or next steps.

#4 – Encourage conversations between managers and their direct reports.

  • Training your managers to speak confidently about your organization’s compensation plan is one of the best ways to increase your transparency around pay and increase employee confidence in your pay practices. In most organizations, employees are more likely to go to their direct manager than HR when they have questions about their salary. If your managers aren’t able to explain the reason behind compensation decisions, this opens the door for salary negotiations, disengaged employees, and flight risks.
  • I always remind my clients that every organization has to start somewhere and you can always increase your level of transparency over time (especially if you don’t have a compensation plan in place just yet). What you want your managers to share with employees regarding compensation will depend upon your desired level of transparency and if you have a compensation plan in place, but training your managers to know the basics of compensation (e.g. what is a salary range?) as well as how your compensation plan was developed are great places to start.

Let’s Hear from You!

How transparent has your organization decided to be in regards to your pay practices? Have you found that increasing transparency around pay has created challenges or successes for your organization? Tell us in the comments below!

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3 Comments on "Why Increasing Pay Isn’t Always the Answer"

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Gina R Bridges
Gina R Bridges
10 months 25 days ago

This post contains very informative ideas and information. Expecting more from you here.

Michael Cope
Michael Cope
9 months 28 days ago

I agree with your point on pay Sonnet. Perhaps sub consciously remembering pocket money as a child, most people broadly understand that this is all tied up with how much money the payee has and what they’ve done (or not!) to deserve a payment.

I think where the contention often lies in perceived unfairness around bonus / commission / incentives, career progression and work / life balance…as this can often feel more personal somehow than pay because it directly the company’s view of their efforts.

9 months 1 day ago

please what are the challenges faced while defining your organization’s compensation strategy?