As inflation continues to cause problems for both cost of living, as well as cost of doing business (As of publishing, US Inflation Rate is at about 4.93%, compared to 4.98% last month and 8.26% last year. This is higher than the long term average of 3.28%) a more pressing topic has become compensation.
- Are you paying a "living wage"? Heck, what even is a living wage and can my company afford it?
- Are you up-to-date with current regulations on pay transparency? Are you providing the pay transparency your people are demanding?
- Do your people feel valued? Are they making assumptions about pay and company finances?
Here's a hot take: Your staff, your teams, and their friends are all talking about pay and how much they make whether you like it or not. Why are you not taking proactive initiative and managing the narrative and driving trust with a clearly enunciated compensation strategy?
Pay Transparency has Clear Benefits but Needs Careful Management
I recently was on a panel called "You're doing HR all wrong" at the Climbing Wall Association Summit, and by far the biggest topic was pay transparency. I also just recently hosted a seminar with Climbing Business Journal about Hiring & Retaining Your All-Star Team. Similarly to the HR Panel, one of the biggest topics during Q&A was pay transparency. Clearly this is a pressing issue amongst businesses. So what can we do as leaders and managers?
Data shows clearly that pay transparency during the attraction and recruiting process will give you better more qualified candidates (and waste a lot less time). Some data from the Society for Human Resource Management (SHRM) clearly displays this:
82% of U.S. workers are more likely to consider applying to a job if the pay range was listed in the job posting.
73% of U.S. workers are more likely to trust organizations that provide pay ranges in job postings than ones that do not.
33% of applicants indicated they would not accept an interview without first knowing the pay range for the role.
But what about culture? What happens on-the-job when pay transparency is created inside of an organization? It leads to engagement, organizational trust, and improved productivity. The benefits are clear. Research conducted by Harvard Business Review concludes that:
"...studies indicate that, at least in the short term, pay transparency may have some important benefits for employees and their employers. For example, pay transparency has positive impacts on employees’ perceptions of trust, fairness and job satisfaction and has been found to boost individual task performance"
There is however some possible downsides of pay transparency. According to the Harvard Business Review:
"Our research uncovered that in firms adopting pay transparency practices, supervisors, who may not have had any say in adopting the company-wide policies, assume a self-protective approach when this happens. Because it’s often time consuming and psychologically draining for them to address employee complaints and salary adjustment requests, we found that they take steps to reduce differences in compensation within the same job level. More specifically, we found that transparency drives managers to make employees’ performance-based incentives more similar to each other — in other words, compressing them"
The HBR research also indicated that pay transparency makes employees more likely to negotiate for individualized rewards, and that supervisors are more likely to award them. The takeaway here is that your supervisors, leaders, and managers must be a part of designing the comp plan, must be well trained and educated on how to handle negotiations and deal with employee concerns in a constructive and respectful way. And they need to be given clear training and guidelines on how to manage their team's compensation appropriately.
Where do I Start?
First, focus on what you can directly control. Which is: how much you pay people and how you communicate it. There are so many factors affecting pay perception that you cannot control: inflation, cost of living, the economy, etc. This is where a strong, clearly communicated and regularly reviewed compensation strategy comes in.
Is your current compensation process undefined? Are you constantly reacting to inbound negotiations from team members? Or does your compensation process look more strategic and proactive?
- Established Salary Bands regularly reviewed and monitored against multiple data sources
- Actively and regularly reviewing compensation to ensure equity of pay
- Published/ongoing communications to employees and hiring managers on how pay is set
- Managers, supervisors and leaders are part of the planning and well trained on how to manage the plan on a go-forward basis
How can I Give Clear Upside to my Teams & Mitigate Downside Risk to the Business?
While there is no one-shot-silver-bullet answer, I usually recommend a blended comp strategy that combines base pay with variable pay depending on the roles. For example:
- For more entry level roles which tend to be more market competitive across multiple industries (customer service associates, etc) I'd recommend a market-based competitive base wage. If it makes sense, you can throw in commissions or group bonuses.
- For more senior roles which start to get closer to having direct influence or control over company strategy and are more nuanced and industry specific roles, I recommend a base pay that is competitive but a heavier focus on variable pay based on company and individual performance.
Your biggest cost with more entry level roles outside of pay itself is inevitably going to be the cost of employee churn, which can cost up to 30% of that role's annual pay! And trust me, if you aren't paying competitively, these people will leave for the next entry level job that does. This is why I usually recommend a higher competitive market-based wage for these types of roles.
For your more senior role, you should be seeing less turnover and outside of pay your biggest risk is people leaving due to a lack of engagement, autonomy, learning and development opportunities. This is why giving targets and clear metrics to these roles works well. It provides autonomy for these folks to have direct control over their total take-home. High performers will thrive in this scenario.
This type of set-up mitigates some cash implications and downside risk for the business. Increasing your entry level roles by a few percentage points is super meaningful for them and not super costly for you. Doing the same base-wage increase for the top of the company can by VERY costly, and if they don't perform it can have major adverse impact on your P&L. Hence why a variable pay set-up can be ideal.
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