Demystifying Compensation for Everyone
By Ben Mueller
Scene 1, Take 1: A Compensation Conversation—Without the Proper Rehearsal
You’re a people manager walking into a one-on-one meeting about compensation. As you begin to share the news—a pay raise you thought would be well-received—you’re having difficulty explaining how the compensation decision was made, and answering all of your employee’s questions as well. A confused look appears across the table. The employee is unsure whether to be excited or concerned. After a little more fumbling, you end the talk with an awkward, “Okay then… great!” The employee and manager both walk away wondering what could have allowed for a more open discussion. End scene.
Discussions about compensation tend to be among the most difficult in the workplace. They center on how much a people manager and company value an employee’s contributions, and thus how that employee is rewarded. Furthermore, communicating the compensation decision to the employee is just as important as making the decision itself. Sneh Kadakia, People Business Partner at Namely, understands communication breakdown can happen in a few places when it comes to talking compensation—between HR and leaders, leaders and people managers, and people managers and employees. “Employees and people managers alike often feel like compensation decisions are made in a black hole,” Kadakia says.
HR primarily focuses on equipping people managers to lead compensation conversations with their direct reports, which begs the question: Is your HR team proactively educating the entire workforce on your compensation practices?
Given that several organizations have made a commitment of transparency about their practices to their employees, compensation decisions should be no different. “The more educated both people managers and employees are about compensation practices, the more valuable and engaging the conversation will be,” Kadakia says. The goal is to shed a light on your compensation strategy to set up both your people managers and employees for success.
This naturally leads to a few more questions:
- How transparent should companies be about the inner-workings of your compensation practices?
- Who should be privy to what level of information regarding your compensation practices?
To bring your company culture into your compensation strategy, here are some ideas:
Set the Stage: Define your total rewards commitment.
“Together, HR and leaders need to take a step back and think about how they’re defining rewards and compensation practices in the context of their commitment to the employees,” says Kadakia. Of course, this value proposition will be different for every company.
By explaining to employees how an organization rewards and values its people, you set the company up to connect rewards back to the company’s core mission.
A few things to consider:
- How are you connecting your total rewards commitment to your company culture?
- What do you want your employees to take away about your rewards philosophy?
- What components equal “total rewards”? This may include base salary, variable pay, and company equity as applicable to individual roles—but also employee benefits, education assistance, professional development opportunities, etc.
- How do rewards decisions reflect fair and thoughtful pay practices?
Namely’s suggestion is to spell out your total rewards commitment and share it with all employees. This commitment ties back into every stage of the compensation cycle—from merit increases to promotions, to equity refreshes and variable compensation payouts. Also, consider dropping the HR jargon and using language and tone that align with other company messaging.
Act 1: Standardize the how and when of salary increases.
Define and share the standard reasons for when an employee could expect an increase to their salary. That way, employees across the organization know the why behind any changes. The size of the increase to base salary at an individual level depends on the company’s budget at an organizational, departmental, and team level.
Consider the following examples for when salary increases may occur:
- Market-Based Adjustments: When HR determines the external market benchmark or the internal practices have changed for a role, the salary is reviewed and increased accordingly.
- Promotion-Based Increases: When an employee moves into a new job—upward or to a newly defined position that expands the scope and role of his or her responsibilities—a salary increase is in order.
- Performance-Based Increases: When an employee meets or exceeds expectations, a merit increase is given to reward their performance.
For performance-based increases, your company may be following an annual merit cycle. Given the maturity of your company and how quickly you’ve grown your workforce, you may want to consider a quarterly or bi-annual cycle for merit increases as a short-term solution. Waiting too long to consider merit increases or facilitate compensation talks can inadvertently demotivate high performers and top talent.
“There may need to be flexibility and agility built into when compensation conversations happen depending on your business and talent strategy,” Kadakia says. The key is to be open-minded about your compensation cycle and determine how you can be most thoughtful to both the new talent continually joining your company as well as current employees contributing to your business everyday.
Act 2: Enlighten all parties about compensation.
As HR professionals, the last thing you want to hear your people managers say when sharing compensation information with employees is, “Well, that’s what HR decided and told me to share with you.”
There are three groups of people that should be considered when you are educating your workplace on compensation:
- Executive and Senior Leadership
- People Managers
- Individual Contributors
Your executive and senior leadership team should have full transparency into your compensation practices—everything from how the budget was determined to what the guidelines and criteria are for compensation decisions. This clarity and support at the top level is very important, as it sets the tone and messaging for the downflow of communication.
Your people managers are the decision-makers and the communicators of that decision. They play an incredibly vital role in translating the value of an employee’s performance, contributions, and leadership into a compensation change. This group is also responsible for then taking that compensation decision and relaying it to their employees. This is the most important communication point in compensation discussions: the people manager and the employee.
Director’s Note: Spend the time developing and delivering tools, resources, and training to support your people managers in understanding compensation practices—as well as the art of delivering that message. We recommend including “real play” scenarios in your training sessions so people managers can practice delivering compensation recommendations in a group setting. This creates a platform to get feedback in real time and learn best practices from each other and HR. Also, consider scheduling “HR Open Hours” or one-on-one sessions with people managers to review talking points and practice delivery.
Your individual contributors are the recipients of compensation decisions. Their experiences are shaped by what is communicated at the leadership and company level, followed by what is ultimately communicated to them personally by their people managers. Helping your employees understand how compensation is defined and what aspects are considered when making decisions allows you to manage expectations. This can take the form of training, information sessions, or all-company communications. An understanding of your compensation practices also empowers and motivates them to take ownership over the parts of compensation they have the ability to impact. Consider this one of the many ways to retain and engage your talent.
We believe educating your entire workforce, at a high level, on your compensation philosophy and practices will pay off—literally.
With everything said, you are the HR professional that knows the culture of your company and employees the best. Gauge the readiness for open dialogue around compensation. Transparency isn’t an “all or nothing” approach. For one, publicly sharing your total rewards commitment and reasons for salary increases is a great start. Openness around compensation is a thoughtful change management strategy that may eventually lead you and your leadership down the path of total transparency around rewards.
Scene 1, Take 2: A Compensation Conversation—Successfully Performed
You’re a people manager walking into a one-on-one meeting about compensation. First, you quickly recap how the decision was made and what criteria was considered at a company level. The employee is attentive and receptive. You then share the decision around the individual’s compensation increase, and connect it back to how you value the employee’s performance and ongoing leadership—using specific examples and details, of course. The employee is right there with you. He or she attended your company’s “Compensation 101” session, so the employee has an understanding of your compensation philosophy, when to expect a salary increase, and how to prepare for this exact meeting. Your conversation is open and meaningful. You close with a genuine “Congratulations!” The employee walks away knowing that his or her contribution to the company is valued. End scene.
The size of the increase to base salary at an individual level depends on the company's budget at an organizational, departmental, and team level as well as industry salary trends.
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