6 Tips for Effective Employee Compensation Discussions Featured Image

6 Tips For Effective Employee Compensation Discussions

Is pay the top motivator for employees? 

Industrial psychologists have debated this issue for years. 

Current thinking recognizes that other factors such as recognition, advancement opportunities, work activity, and other rewards can also serve as motivators. 

But, for most people at least, pay is at or near the top of the list of reasons to seek a new job, change jobs, or quit a low-paying job. 

As a team leader or manager, one of your most important responsibilities is to keep your employees motivated and productive. A significant part of your success will be attributed to your ability to effectively discuss compensation matters with your employees. 

The Covid effect 

The mandatory quarantines of the Covid-19 pandemic brought many changes to the workplace, emptying offices and placing employees in a work-from-home environment. In March 2020, WFH moved from marginal to mainstream. 

With this transition emerged a new employee perspective: money or life. A recent World at Work survey found that employees are now seeking a greater work/life balance. 42% of respondents would take less pay and a ‘lower’ title to work from home and have a more balanced work schedule.

As we transition to a new normal, businesses are now facing what has been coined “the great resignation” by the media. 

Various news stories have reported that as many as one employee in four are now considering switching jobs during the post-pandemic recovery. Reasons often cited include career advancement, benefits, work/life balance, and a feeling that WFH should no longer be negotiable. 

As employers scramble to retain valued employees, effective compensation discussions are now more important than ever. 

Here are some ideas for making the most of employee compensation discussions.

1. Understand your firm’s compensation philosophy

Step number one is to learn your organization’s pay philosophy. 

The management of some firms are determined to be a pay leader in order to attract the best employees. Other companies try to set salaries that are competitive with the local area. In certain industries, variable and incentive pay plans may be used to recognize and reward top performers.

Some firms define pay levels and salary ranges that are communicated to employees, while other employers may prefer to keep pay matters close to the vest and subject to top management discretion.

Recognize that employee benefits such as insurance plans and paid vacation are important elements of a compensation plan. Written plan descriptions, policies or summary information in an employee manual often define these indirect types of compensation. 

An emerging trend among progressive firms is creating holistic reward systems that are more personalized and agile in order to attract, motivate, and develop talent. One feature of this trend is developing rewards that are delivered more continuously. 

Such plans are more closely aligned with individual preference considering the employee’s role and contribution to the organization. Two examples might be embracing Juneteenth (June 19) as a paid holiday, or providing an option to receive daily pay. 

Familiarise yourself with your firm’s compensation plans and policies so that you can confidently discuss these matters with employees. 

2. Pay matters at time of hire

Want to attract workers? For the most part, salary is the most important part of a job ad. In general, pay and benefits information in an ad prompts greater applicant interest and response. 

A survey from LinkedIn found that 70 percent of professionals want to hear salary information from recruiters and that 59 percent of candidates felt that salary was the leading factor that fuels career goals.

Team leaders and supervisors often participate in candidate interviews and the selection of new employees. In addition to the customary questions about the candidate’s skill, abilities, or experience, such interviews may include a discussion of salary expectations and an overview of the benefits of working for the employer.

If you are permitted to create the job offer for a new hire, try to formulate an offer that is equitable in relation to the candidate’s experience and expectations while considering pay levels of current employees in similar positions.

Your ability to evaluate the candidate and answer their questions is an important part of selecting qualified employees. Sample data displaying internal and external equity issues is shown on the following chart:

Employees/JobExperienceEducationPay
#1 / Engineer II10 yrsBS$80,000
#2 / Engineer I20 yrsAA$85,000
#3 / Engr Tech  5 yrsAA$55,000
#4 / Admin  4 yrsHS$35,000
    
Candidate  Seeks
#1 / Engineer  2 yrsMS$80,000
    
Marketplace  Median rate
Mechanical Engr BS$90,000
Mech Engr Tech AA$58,000
    
HR recommendscandidate job offer $70-75,000
 Reassess Engr pay  

Some employers in the public sector or unionized environments create pay ranges with a series of pay steps within the range. An employee customarily progresses to each pay step after a period of time e.g. annually. Other firms in the private sector may define a pay range for each job with a minimum (or starting rate) and a maximum rate.

Typically, the job offer for a new employee is set in the lower half of the pay range unless unique work experience justifies a higher starting rate. 

Entrepreneurial start-up firms often operate without defined pay ranges, choosing instead to try to select the best candidate for the lowest pay rate by engaging in pay negotiations as the candidate field is narrowed to the finalists. 

One source for pay data is the Occupational Outlook Handbook published by the U.S. Bureau of Labor Statistics.

3. The big picture

Be prepared to “sell” the compensation package to the candidate(s) that the firm wants to hire. 

Recognize that the firm’s total compensation plan includes insurances, paid absences, and government-required benefits in addition to direct pay. The benefits package often represents 30%-35% of an individual’s total compensation.

As a member of management, it is your responsibility to represent pay issues to the employee in a manner that emphasizes the positive aspect of employment with your firm. For example, tout the percentage of insurance premium costs paid by the employer, or describe any unique benefits, discounts, or perks related to your firm’s industry or services. 

How many vacation (or paid time off) days does the employee receive each year? Is there a waiting period, or can these days be used immediately? Similarly, talk up other paid days such as sick days, family leave, bereavement leave, military leave, voting time, or other paid absence benefits. Paid time off is an important feature in the work-life balance. 

4. Protecting the confidentiality of pay information

Many firms define a pay policy guideline for supervisors and managers with instructions for administering employee compensation. 

Details of an individual’s pay should be treated as confidential. Such matters should be discussed in private where others will not overhear such information. 

Even in organizations where there may be an openly published schedule of pay ranges for jobs, such as in the public sector or unionized environments, discussions about an employee’s pay rate should be conducted in private with the employee. 

Employees often compare notes on pay and may complain to a team leader about a perceived inequity. Again, a private discussion with an individual about his/her pay would be appropriate to clarify the nature of the concern.

However, such discussion should not include details or information about the pay rates of other employees. 

It may be appropriate to explain how factors such as job duties, responsibilities, quantity or quality of work, tenure, education, experience, or working conditions may influence the setting of pay for a particular individual or a particular class or category of jobs. 

5. Equal pay day

Worldwide, women receive less pay than men. All Women’s Equal Pay Day is March 24 (US) in recognition that women working full time and year-round are paid 82 cents for every dollar paid to a man who works the same amount. 

Note that the National Labor Relations Board, a federal agency that administers federal labor law, has held that employees can legally discuss their compensation, regardless of whether they signed a non-disclosure agreement. The board’s position is that an employer cannot legally discipline or terminate employees for discussing their pay at work.  

Similar legal protections are defined in Ontario’s pay transparency legislation, the UK has defined pay gap reporting regulations for larger employers and the European Union has proposed pay transparency regulations and access to justice for victims of pay discrimination. 

The US Equal Pay Act prohibits pay discrimination based on sex, and Title VII of the Civil Rights Act prohibits discrimination (including pay matters) because of sex, race, religion, national origin, and color. Many states have similar laws. 

In the event, an employee complains about their pay compared to another worker(s), acknowledge their concern and ask a few questions to help identify the specific issue. As an HR manager and later as a federal EEO Investigator, I learned to handle pay and other complaints delicately by first asking a variety of questions to clarify the significant issues. 

Possible questions to ask: 

  • Whose pay rate are you comparing? 
  • Why do you feel it is unfair?
  • Do you understand that each job has its own designated pay range?

Most likely there is an objective job-related reason for a pay difference. Factors such as job classification, tenure, performance level, or geographic location may account for pay differences. Likewise, independent contractors may be part of a work team but are not employees included in the same pay plan. 

The federal equal pay law allows for such factors to affect pay so long as there is no discrimination based upon sex. Take care not to discuss or disclose the pay information of other employees.  

Remember, pay issues are a significant and personal matter for every employee. Inappropriate handling of pay issues may lead to legal liabilities. It is best to seek to clarify information or advice from management or human resources if you encounter a unique or sensitive issue. 

A good source of information for handling sensitive pay matters is “Achieving Performance Results: Boosting Performance in the Virtual Workplace.”

6. Beware of salary history bans (US)

In the US, laws in many states now define limits or prohibitions on asking about a candidate’s current pay or salary history as part of the applicant screening process. Some 21 states listed below, and a number of municipalities, prohibit the practice because of its discriminatory effects towards women, minorities, and individuals with criminal records.

In jurisdictions where such laws apply, the recruiter or interviewer must not ask questions about an employee’s current salary or pay history nor consider such information in an employment decision. Likewise, such queries must be removed from any employment application document or process.  

The Ontario Pay Transparency Act provides similar protections. Check with your compliance specialist to see if these limits apply to your firm. 

AlabamaCaliforniaColoradoConnecticut
DelawareDistrict of ColumbiaGeorgiaHawaii
IllinoisKentuckyLouisianaMaine
MarylandMassachusettsMississippiMissouri
NevadaNew JerseyNew YorkNorth Carolina
OhioOregonPennsylvaniaPuerto Rico
Rhode IslandSouth CarolinaVermontVirginia
WashingtonWisconsin

Next steps

Remember, a thorough understanding of your firm’s pay philosophy and practices will help you to navigate the tricky waters of employee compensation decisions by helping you to attract, retain, and motivate the best employees for your team.

If you have any questions regarding the above, drop me a question in the comments or head over to the People Managing People forum, a supportive community of HR and business leaders sharing knowledge and advice.

I wish you all the best with future employee compensation discussions. 

William