What Is Pay Communication and Why Does It Matter?

Imagine this:

It’s a typical Wednesday in your office. You get to your desk, sit down with your coffee, and just as you are settling into your day, a manager knocks on your door in a panic because one of their direct reports has asked for a raise. The employee found salary data online that told them they were underpaid. The manager has no idea if the data is accurate and they need you to help them figure out if the employee does indeed deserve a pay increase and how much you can give. As you’re researching, another manager calls your extension. Another employee has just resigned because they were offered a new job at a significantly higher salary. That’s the fourth employee who has resigned due to compensation this month. You feel like your company is hemorrhaging employees. What can you do to stop it?

Many HR leaders recognize this scenario. According to a PayScale research report, 25 percent of employees who sought employment outside of their current organization cited higher pay as the primary reason. We live in a world where salary data can be found with one click, more companies are openly sharing pay ranges, and some states even have laws around pay transparency. Now more than ever, it is time for HR leaders to take a close look at how their organizations approach pay communication in order to retain top talent and grow in a competitive marketplace.

What Is Pay Communication?

Pay communication is the organizational practice that determines how pay information is shared and communicated to current and prospective employees. That pay information includes pay ranges, raise processes, and total compensation packages. Pay communication doesn’t mean total pay transparency. You don’t have to post salaries publicly for all to see and discuss like the NFL. Having a pay communication strategy simply means being intentional about what you do share and how you communicate compensation to your employees and prospects.

Why Does Pay Communication Matter?

Think of your organization’s overall attitude and approach to compensation practices today. Who decides what employees are paid and how? Does executive leadership decide? Do the candidates negotiate for their salaries? Do you have pay ranges? Do employees know where they fall in those ranges and why? Have you ever conducted an internal pay equity audit to examine whether you pay employees in the same jobs differently for reasons that might not hold up if challenged in a court of law? Are you concerned that you might be collectively underpaying protected groups of people like minorities or women?

Typically, there are two ways companies approach pay communication: reactively and proactively. A reactive approach means addressing compensation issues after they result in problems for the business, like turnover, disengagement, negative reviews or lawsuits. A proactive approach seeks to identify potential issues and address them before they become problems.

In addition to the opening scenario in this article, here are two other common occurrences:

Reactive Scenario One: There are open roles in your organization, and you’ve found quite a few promising candidates. However, whenever an offer is extended, the best candidates choose to pass. You do some research and discover current, former and prospective employees have left negative online reviews about your organization’s compensation. Now, you’ve not only lost out on good candidates but are scrambling to respond to the reviews so that future talent won’t be turned off on the opportunity with your organization. Meanwhile, you’re wondering what in the world you’re going to do to keep this from happening again and what to tell current employees to keep them from leaving.

Reactive Scenario Two: Your small-to-medium business is entering a period of rapid and strategic growth. You need more people to keep up with demand and scale operations, including more leaders and supervisors to manage those people and new roles to build out the corporate infrastructure of a more mature business. You start the hiring process only to have current managers express disgruntlement that the “new people” seem to be getting higher compensation overall than the people who have been there for years. This is a case of salary compression that is clearly unfair to your more tenured employees. What do you do? How do you respond? How do you keep your current employees engaged and prevent people from leaving because they feel the only way to get a raise at your company is to quit and reapply?

What Are the Barriers to Proactive Pay Communication?

Often, establishing proactive policies for pay communication starts at the top of an organization. If you are reading this and concerned your business is reactive, you might also feel like you are powerless because the reactive nature stems from executive management. The owners and leaders of your organization may not have given you the approval or the resources you need to pursue a strategic approach to compensation planning and pay communication. If this is your situation, start by presenting the business case. Why does pay communication matter? How can compensation planning and better pay communication reduce risk or help the business grow?

Another barrier is conflating pay communication with total pay transparency and assuming that if your organization is too open about compensation, employees might become upset to learn they are not at the top of the pay scale. However, this is only a concern if your organization is plagued by pay inequity. It is also exactly the reason why it is so important for compensation to be determined by objective criteria based on data. If your employees understand how compensation is determined and what compensable factors are being evaluated in order to set salaries (such as years of experience, location, skills, etc.), they are more likely to feel satisfied with their pay.

Finally, it’s important to understand that change can be challenging for everyone. You might feel overwhelmed by how daunting the idea of a complete overhaul to compensation policies and processes would be. However, the journey doesn’t have to be completed all in one go, and the benefits are numerous and significant, even just for starting out.

What Are the Benefits of Proactive Pay Communication?

When you establish a proactive pay communication plan, employees learn how your organization values them. This reduces anxiety and builds trust in HR, which in turn results in more open communication and a greater chance to retain employees who might be frustrated. A proactive pay communication plan can result in the following benefits:

Improves retention rates

In our 2019 Compensation Best Practices Report (CBPR), PayScale found sixty-six percent of organizations agree or strongly agree that keeping their best and brightest employees is a concern. In fact, we found that retention is the number one reason organizations adjust their compensation practices. If employee retention is a concern for you, moving toward proactive pay communication could keep top talent at your organization. Indeed, in a previous PayScale study, we found that 82 percent of employees are satisfied with lower pay as long as the rationale is explained.

Increases employee engagement

The CBPR also shows that there’s a gap between how employees and executives view whether or not employees are fairly paid. Only 22 percent of employees agree with the statement they are being paid fairly, while 42 percent of employers believe they are compensating fairly. This chasm is one of the causes of decreased employee engagement. When your employees don’t understand compensation practices within your organization and believe (rightly or not) they are underpaid, they are less engaged with their work. When employees feel valued and aren’t spending cycles thinking about whether they might be underpaid, they’re more likely to be more fully engaged in their work. A more engaged workforce leads to better business outcomes.

Enhances perception of HR

A proactive pay communication plan builds trust in HR as a collaborative partner rather than an obstructive entity. Your employees will see that compensation decisions are arrived at with careful thought as well as market data. Showing that you have a well-researched and organized approach to something so fundamentally important to the workforce goes a long way in helping employees to trust that the organization values them and that they are being paid fairly. It helps them believe that HR has the best interest of employees in mind.

Boosts morale

When the employees in your organization feel valued, morale will increase. Your employees will feel that they really do work for a good company that cares about them as people and takes the time to let them know that they are valued. This will also lead to better interactions between employees and between employees and customers.

Reinforces company culture

Because a proactive approach helps to foster trust, your organization’s stated values will resonate more. Employees will feel like an important piece of a larger whole. Conversely, a reactive approach to compensation leaves employees feeling that they are being left out of information that is critically important to them, which will impact their perception of the company holistically. They are left to scramble to fill in the blanks of what they do not know and, when that happens, incorrect information is much more likely to circulate. When you are proactive, you control the overall message.

What Immediate Steps Can You Take to Improve Pay Communications?

So, how can you put together a pay communication plan, even if you are new to proactive compensation planning? In part two of this series, we discuss some immediate steps you can take to improve pay communications at your organization. We will also lay the groundwork for how to start thinking about maturing your overall approach to compensation planning.  Be sure to check out the next post in this series and, in the meantime, leave a comment below if you have any specific questions or insights to share about the challenges you are facing at your organization. We’d love to hear from you.