Strategies for discussing compensation openly and confidently
It’s that time of year again! Employees are anxiously awaiting their annual pay and performance discussion, and managers probably dreading the same. Unfortunately, even the best of managers typically don’t look forward to having compensation discussions.
There are built-in challenges in the annual increase and performance management discussions. Limited budgets, forced rankings, or a vague approval processes that can leave managers feeling less than confident when having the compensation conversation with employees.
Alas, talking about pay and being able to address employees’ questions are necessary for many reasons. Discussing accomplishments and opportunities for growth and connecting them to pay positioning and increases is very important, particularly in a company that espouses pay for performance as a compensation driver.
As pay transparency has become not only a legal requirement in several states but an expectation from employees, it’s even more important that you prepare your managers to provide employees with accurate pay information.
Here are some things to consider when preparing your managers for pay discussions with their employees.
Prepare in advance for the compensation conversation
Begin preparation and planning for your annual increase and performance process early! Take advantage of the slower times in the year to assess alignment, identify administration improvements, and otherwise examine your process. Recognize that any changes you need to make will likely need buy-in from key stakeholders and to follow a chain of approval. That takes time.
Listed below are a few things to consider early on in the year to better prepare for transparent pay discussions between managers and employees.
Learn from prior years
You know how you’re frequently asked to complete a customer satisfaction survey after a retail or telephone transaction? Why not do something similar after the annual increase and performance management process?
Check-in with managers to see what went well during the annual increase process and what could be improved. This can be done through a quick survey, digital focus group, or even an in-person discussion. Use their feedback to improve the process in the coming year.
Employees can be another source of feedback. In particular, asking them how they feel the process went will likely help you identify improvements in training managers or in communication.
Look at the approval workflow
“I don’t know, it’s not the percentage that I submitted, but this is what came back from HR/Leadership.” Gasp! Should A manager be saying that? Absolutely not, but unfortunately it happens more often than it should.
How much discretion they have and how the final decisions are made and communicated back to the manager will all impact their sense of ownership in determining the annual increases.
Ensuring they understand why any changes are made to their pay recommendations is critical to helping them confidently deliver the increase message to employees. For example, a manager submits their recommended increases, which includes a 3.5% increase for a particular employee. When that manager is given their final approved increases, the aforementioned recommendation has been reduced to 3.0%. They are then directed to communicate that increase to the employee, with no additional context.
Don’t let this happen. Build into your process clear expectations and guidelines for the manager to use when developing their recommendations. Create a communication mechanism that will provide the manager with context for any changes that are made to their recommendations.
Align to compensation drivers
How much and what you can ask managers to discuss with employees about pay really depends on how confident you are in your current compensation management and administration. Can you be transparent and not worry about misalignment? Does how you are paying employees currently match up with the compensation philosophy you communicate?
Identify and monitor how your employees are distributed throughout your pay ranges and how that aligns with your compensation philosophy. Of course, this is much easier if you have a compensation management system in place, but it can be done fairly easily with spreadsheets and a few simple formulas.
For example, if one of the drivers of pay in your organization is experience in the current job, then take a look at how employees with longer time in position are paid within their ranges versus those with less time in position. You should see that those with more experience are on average positioned closer to the midpoint of the range (or market reference point) than those with less.
If performance is a compensation driver, you’ll want to do a similar assessment using performance. Both assessments can be conducted formulaically to identify average and outliers. In a perfect world, on the whole, you are aligned and fixing outliers is something that can be done either in advance of, or in connection with, the annual compensation increase process.
These are just examples of what to assess in advance of the annual increase process, particularly now in the age of pay transparency. There are many compensation formulas and metrics that can be used in regular reporting to keep an eye on whether or not you are aligned.
The goal is not to put managers in the uncomfortable position of stumbling into pay alignment issues during their discussions with employees. Be prepared to implement a plan to resolve any issues in advance.
Provide your managers with context
According to Kevin Poff, Partner at Mercer, employees and managers often enter pay conversations with very different reference points.
Managers likely already have compensation data, an understanding of the company’s financial position, and a perceived value of a particular employee based on performance and role. Managers may also have an idea of how other employees are being paid, which is information that is not available to the employee...not in a concrete way, anyway.
What do employees have? Well, it used to be that they have the internet and, likely, a few peer pay comparisons based on who they define as their "peers." Now, they’re seeing a lot more job postings with pay ranges. Depending on the policies and locations of the company, they could be seeing their own organization’s pay ranges/structures.
In order to provide the manager with the context and education they need to bring their viewpoint closer to that of the employee, at a minimum managers should be provided with:
- Your company’s compensation philosophy and an understanding of what it means
- Merit and total increase budget and an explanation of how that’s determined
- Salary structure that is used to manage pay, the applicable ranges, and how the structure is determined and maintained
- Factors used to determine increase percentage for each employee (e.g., performance rating and position in range)
With this understanding, the manager can provide accurate guidance and knowledge to the employee, focusing on facts.
Support managers and employees
As HR, it’s our goal to include information around the compensation philosophy, relevant salary structure and range information, connection to performance, and incentive information as part of the employee value proposition we present to employees from the time they apply for a job. Making pay more of an open conversation will take some of the burden off of managers.
With pay transparency becoming the new normal, consider incorporating the following into relevant employee communications, on-boarding, and training:
- How does the company determine pay?
- How are pay increases determined?
- What role does cost of living play versus cost of labor?
- How does the company establish pay increase budgets?
Of course, as a member of the HR team, you should make yourself available as a sounding board and resource for managers. Help them prepare for the conversations with employees and then address questions and issues after the fact. An employee often will need a follow-up conversation to fully embrace the messaging provided and managers need to be prepared for that.
A final thought for training managers on how to discuss compensation
One of the biggest mistakes that managers make is probably underestimating the personal nature of these pay conversations and realizing that employees are often uncomfortable having these conversations too. Facts are important and managers need to remain calm and professional. But, remember and try to connect with the fact that employees are not thinking about compensation analysis, formulas, HR metrics, or budgets.
They may be thinking about paying for food, college, a vacation, or caring for their aging parents.
Looking for more insight on how to support your managers in their pay discussions? Give Mercer a call at 1-855-286-5302.