Pay transparency in spotlight

Growing pressure to improve pay-for-performance programs and ensure fair, transparent pay practices is prompting changes to employee compensation programs, according to a survey by Willis Towers Watson.

Almost half of respondents (49 per cent) said they are planning on or considering increasing the level of transparency around pay decisions.

“Getting compensation right is becoming increasingly important as employers look to drive higher levels of performance, attract and retain talent, and make fair pay decisions,” said Sandra McLellan, North America business leader, rewards, at Willis Towers Watson in Toronto.

There are several driving forces behind the trend, and one is related to transparency more globally around the fairness of pay practices, she said.

“These questions come up specific to gender pay: ‘What’s our gender pay gap? As a company, what are some of our inclusion and diversity practices, and are we making that happen, are we helping to support that through pay?’ So this is increasingly part of many organizations’ social responsibility agenda; these are topics that have worked their way into their broader sense of their sustainability plans.”

A majority of employers believe in the concept of diversity, with nearly 57 per cent indicating fair pay is a priority for the next three years, found the survey of 1,949 employers worldwide, including 88 Canadian employers. And 82 per cent intend to conduct a gender pay or pay equity diagnostic.

Some of the push is also coming from boards and HR committees taking an increased interest in the bigger picture, said McLellan, so “questions around gender pay equity and inclusion and diversity are coming up as part of the overall health of the company.”

Without a doubt, there is more interest in pay transparency, said Janet Salopek, president and senior consultant at Salopek & Associates in Calgary.

And one of the reasons is the younger generations in the workplace.

“Transparency is very, very important to them, and they will decide to stay with the company… if they sense and actually are experiencing higher degrees of transparency,” she said.

“They grew up on and have come to expect information at their fingertips, so that means information about the company — who they work for, and how employers do their business with respect to how they pay their employees and all of that, as it relates to compensation. As such, they expect to understand it, and require… that employers be more transparent.”

People are also more open about their pay, said McLellan, especially with social media telling people what they might be worth in the marketplace.

“People are just living in a world where we’re more comfortable sharing that kind of information,” she said.

“If, as an employer, you’re leaving the explanation of programs to people to figure out for themselves, then there’ll be much more interpretation than if you’re actually helping to make it easy and explain a bit the ‘why’ of the programs.”

Cost concerns

The survey revealed several factors are prompting employers to make or consider changes to their programs including manager feedback (78 per cent), employee feedback (73 per cent), cost (69 per cent) and the changing marketplace (61 per cent).

The cost piece always comes up in surveys — it’s a competitive reality — but employers are having a harder time getting a handle on costs, said McLellan.

“They’re adapting to a world where people do move more often than they used to between companies, so even as part of their transparency agenda, (it’s about) how they’re going to manage base pay, really thinking about how to better simulate the pay progression that people have in the external market in their careers as they might have internally… managing the cost of that with balancing the reality of that to encourage people to stay longer with them.”

And with legislation barring employers from asking too many questions about prior compensation, starting salaries are that much more important, she said.

“Striking a balance between fairness and affordability is a big part of transparency because we all know one of the biggest predictors of pay is what it was when you’re hired. So, starting salaries start to become a really important levelling ground in making transparency happen from the very beginning.”

Boosting transparency

When it comes to boosting transparency, one of the key decision points is whether to make pay ranges public, or just the one for the individual involved, said McLellan. It’s about deciding what and when to communicate.

“The other question is: How are you designing programs in a way that supports what happens when people talk to each other?” she said. “One example is if you have a salary increase program, does it always make sense to have managers agonizing for hours over whether to give someone a 2.1 or a 2.2 per cent increase, where that difference when communicated is a difference that may not even be intentional? So, when we have differences in bonus payouts, are we really clear about the length between the amount in the pay, and really stepping back and thinking about… how can we put the design of the program through a transparency test before rolling out a new program?”

It’s about the structuring the compensation so people understand it, said Salopek.

“(Employers) develop structures, pay grades, incentive programs that they can go out and, in general concepts, explain to their people, so then they can get it and see where they fit within that design,” she said.

“You’re still seeing in the workplace individual compensation is confidential, because of privacy (concerns), but the structure around how you arrive at that compensation level is what is becoming more public, so organizations do that through their intranet, through leaders getting in front of their people. And it’s direct communication right from the leaders on ‘what’s important to us with respect to compensation and what that looks like, and what we value and what we pay for.’”

Incentive plan changes

Decisions around pay are more complex, and many employers say base pay and short-term incentive programs are falling short of expectations, according to McLellan.

“Not surprisingly, changes to these and other related programs are on the horizon.”

Forty-three per cent of employers are planning on or considering redesigning annual incentive plans, while 37 per cent are planning on or considering changing criteria for salary increases.

“Some of the more macro design changes around companies’ business models are changing so fast, are we even using the right measures to measure company performance? It’s more at the individual level, as maybe we stop using ratings or we change our approach to measuring performance, are we paying for the right things? If people work more in teams, are we still rewarding people for going it alone or are we rewarding team contribution?” she said.

It’s about deciding whether or not to have a big portion of the bonus tied to individual performance, or isolating some of the top performers to make sure they are differentiated, said McLellan.

“These are the kinds of conversations that folks are starting to have, and it is a bit linked to that transparency question as well, the ‘What are we paying for?’ question.”

Employers are taking a more future-focused approach to managing performance, according to the survey, as 45 per cent are planning on or considering changing the focus of performance management to include future potential and the possession of skills needed to drive the business in the future.

“(Employers are) looking at not only what the employee has done but what they can bring to the organization, and they’re compensating them accordingly,” she said.

“It’s (also) what can an employee control and what do they have control over, and that’s what they’re basing incentives on. So, you’re seeing less of team bonuses and things like that. It’s ‘What can an individual control and effect?’ And they’re basing bonuses on that.”