How to effectively communicate merit increases to employees

It is the time of year when many employees will be receiving compensation statements confirming their merit outcomes.  To prepare managers for those tricky conversations, we offer five steps to help you get ahead.  

Preparation is critical because you can have a great pay strategy with accurate benchmarking and well-defined pay structures, but if this is not communicated to the stakeholders, it may not be successful, and you will miss this critical opportunity to demonstrate how you value your employees. There is also the issue that talking about pay can be sensitive, personal, and linked to feelings of self-worth. 

So here are our five steps for effective merit increase communications:  

1. Determine your key messages and communication objectives  
2. Identify your key audience groups 
3. Decide who will do the communicating and roles they will play 
4. Select the best methods of communication for each audience 
5. Train your managers  

Step 1: Determine your key messages and communication objectives  

The overarching objective is that we want to communicate pay well so that employees understand their pay outcomes and are inclined to stay with the organization, feel valued, engaged, and motivated to perform better. To do this, your key messages should provide both strategic and individual context. 

So, starting with strategic context, be prepared to explain how this year’s merit outcomes relate to your overall compensation philosophy and approach. Articulating what factors you aim to recognize will underline your philosophy. Do you have a pay for performance strategy built into your merit review? Is cost of living a factor in merit increases? Is location specific pay relevant? Has company or business unit performance determined available budgets? Do you have a specific market pay strategy driven by skill and labor requirements?  All are relevant points to help improve overall understanding and frame how your merit outcomes are reflective of your business strategy.  

Next, for individual context, there are three key questions employees have about their pay:  

1. How was my pay determined?  
2. How can I progress my pay? 
3. How does my pay compare to my peers?  

The answer to the first question is really about your pay strategy. Is there some kind of pay range? Whether you reveal this range to the employee depends on your level of pay transparency. The employee also wants to know how you decided that this range is appropriate. Then how did you determine where they fall in the range, so what were the compensable factors that contributed to that decision? Was it performance, experience, time in role for example?  

Talking about pay progression is important because most employees will have personal and professional goals that they are trying to meet. For example, how does an entry level marketer become a mid-level marketer? Are there tiers for certain roles, like software developer 1, software developer 2, etc. and, if so, how do they get from tier to tier? If not, what are the options for growth? If the answers employees get are rational, honest, and offer a path upward that they feel they can achieve, the employee is more likely to feel valued and stay with your organization.  

For the final question, it is worth noting that the issue of pay fairness has become a critical part of all conversations on pay. Pay equity has become a societal, economic, legal and political issue with companies facing greater scrutiny on what they’re doing for pay fairness. Payscale’s research supports the growing importance of pay fairness and found that when employees don’t feel they are paid fairly, they are more likely to leave. Without a formal pay structure or data-backed compensation rationale this question can be difficult to answer. Increasingly employers are conducting pay equity analysis to ensure a robust response to such queries and manage litigation risk.  Building such an analysis into your merit review preparation is highly recommended.  

Step 2: Identify your key audience groups

The next step is knowing your audience and how each group will have different priorities and expectations for what will be communicated. So, consider the different stakeholders in the communication process and what they will need to know, rather than adopting a one-size-fits-all approach.  

Your leadership team will hopefully want to understand the overall impact to the organization and how merit review outcomes can enforce company culture and impact business performance.  If there were specific talent market issues that influenced decisions, share this as well.  

We outlined above how managers need both strategic and individual context to put them in the best position to have meaningful conversations. When it comes to employees, consider whether you need to segment your audiences for communication, particularly if you use significantly different pay approaches for different groups. What’s important here is that you consider tailoring your pay communications to meet everyone’s needs.   

Step 3: Decide who will do the communicating and the roles they will play. 

It’s important to be intentional about how your pay processes are communicated, including who is doing the communicating. As with any good communication strategy, you can utilize different actors in the process.  

It is worth considering who should introduce messages and who should reinforce. So, if you are communicating a new pay approach, or perhaps need to explain how a challenging financial year has impacted budgets, it helps if the initial delivery comes from a trusted source. This could be your CEO or your executive leadership team. It could be your chief people office or chief finance officer.  Your trusted source should lead the initial communications and introduce company-wide strategy and compensation goals.  

Typically, reinforcement happens with managers having individual conversations with employees. You want them to be able to link the broader strategy to each individual employee, reiterate and support the decision-making process, and be able to respond to employee concerns and escalate questions. We will cover in step 5 how to prepare them for this.  

Step 4: Select the best methods of communication for each audience 

Once you have identified your audience segments, you can select the best methods of communication. Don’t just think about email and paper documentation. Today’s employees use multimedia in their personal lives so give them different options so they can access information when it suits them as well as aiming to make it interesting and engaging.  

For example, you might want to consider creating on-demand video content to explain your pay practices and share this information with employees through an employee portal. Payscale even has services to help customers using our compensation management software to create this kind of content.  

Finally, always remember that good communication is a two-way street, so building in feedback loops and opportunities for questions is important both during and after the process.  Increasingly, we see the greatest gains when clients implement a post-review feedback process, giving stakeholders an opportunity to comment on how the process worked for them.  

Step 5: Training Managers  

What managers are empowered to explain in pay communications, and when, will depend on the compensation maturity and level of pay transparency that the organization has adopted. You’ll have to decide what senior leadership knows, what HR knows, what managers know, and what employees know. Minimally, every manager should know: 

• When to have pay conversations with employees 
• What to cover as part of those conversations 
• How much managers are allowed to say about how compensation is determined 
• Which questions or scenarios to pass to HR to handle 

Don’t assume that managers know how to have compensation conversations with employees. A key part of planning is providing managers with tools to handle both the common and more unusual scenarios. For example, managers may need to be trained on how to prepare for meetings with employees, including which documents to bring. You can help them by providing a checklist of necessary materials, such as the company’s pay philosophy, the employee’s salary history, the teams’ salary history, the employee’s job description, and past performance reviews.  Managers may also require role-play training, especially where managers are expected to tackle most pay communications themselves.  

At a more practical level makes sure they are prepared to respond to the following types of questions:  

• Why does so-and-so make more than me? 
• What is the pay range for my position? 
• How often can I expect a raise? 
• Where does our pay data come from? 
• What’s the outlook for pay raises?  
• What metrics do you use to evaluate the success of your employees? 
• Do we have a gender pay gap? 

Sometimes we forget to prepare for the difficult scenarios as well, so ensure your training and toolkits cover recommended responses to those tricky questions Example scenarios might be:  

• When an employee is overpaid or is an outlier 
• When an employee isn’t eligible for a raise 
• When more money isn’t an option 
• When an employee reacts negatively to an increase and pushes back 

More broadly, there are some key tips for some basic do’s and don’ts. Whilst they may seem obvious, they are always worth calling out. 

Managers have a critical role to play in pay communications.  When they feel confident, employees will feel confident, so your investment in training will help you achieve your pay communication goals.  

We know from our research on compensation best practices that:  

• Top-performing organizations are more likely to trust their managers for those tricky comp conversations:  67 percent of top performing organizations are either confident or very confident in their managers’ abilities to have tough conversations about pay (versus 57 percent of typical) 
• Top-performing organizations are also more likely to train managers to talk about pay: 36 percent (versus  27 percent). 
• Top-performing organizations have greater aspirations for being transparent with their pay practices: 62 percent of top performing  organizations aim to be transparent about pay in 2018 (versus 56 percent of typical) 

Following the five steps outlined above will set you up for success in your pay communication approach and ensure you maximize the opportunity to engage and motivate your employees  and ensure a common understanding of how your merit review has reinforced your overall compensation philosophy.