Show me the (story behind the) money

How much information should you share with employees when it comes to compensation? There’s a lot riding on the answer to that question.

Research has found the way organizations communicate about compensation can influence the extent to which employees feel they are paid fairly — which can unleash a wealth of other positive outcomes.

For example, a global survey of 33,000 employees by IBM found respondents who indicated they felt fairly paid also reported higher levels of engagement, mental and physical health, and personal life satisfaction. These respondents were also less likely to report feeling unreasonable levels of work stress and were less inclined to look for another job.

In a 2014 whitepaper on its research, titled Perception is Reality: The Importance of Pay Fairness to Employees and Organizations, IBM indicates there are three key drivers of an employee’s faith in the fairness of his pay:

• understanding how pay is determined

• knowing how to maximize pay

• believing pay is related to performance.

So employers seeking to retain and engage top talent and build a high-performance culture are realizing how they communicate about pay is a key consideration. 

For those who might question the importance of pay fairness, research in behavioural science has shown “the perceived fairness of rewards is a very strong factor in people’s response to them, and that it has deep roots in the development of the human brain,” according to a 2015 report by the Chartered Institute of Personnel and Development (CIPD) titled Show Me the Money! The Behavioural Science of Reward.

“Behavioural science also suggests that our subjective value of our level of pay and reward is inherently linked to our perception of others and how they are rewarded for the same productivity,” notes CIPD. 

“For instance, discovering a co-worker of the same level is rewarded more for the same activity tends to illicit considerable resentment.”

However, while organizations may understand the need to communicate on pay in principle, putting that into practice is easier said than done. Many employers communicate about compensation programs to only a limited degree. 

There was even a drop in pay communication levels in 2014 versus 2010, according to a survey of 671 managers on compensation programs and practices by WorldatWork.

Thirty-nine per cent of the survey respondents indicated they share “minimal pay-related information” with employees, up from 32 per cent in 2010. Meanwhile, 44 per cent indicated they share “information regarding the design of the pay program” (such as strategy, compensation markets and link to performance), down from 49 per cent in 2010.

Further, in a 2011 WorldatWork survey on reward fairness, respondents acknowledged employees were expressing concerns about the lack of fairness in reward elements. For example, 25.3 per cent of respondents indicated employees frequently expressed concerns about the fairness of base pay or merit increases, while 19.2 per cent said employees frequently expressed concern about the internal fairness of actual base pay amounts.

In addition, 24.3 per cent of respondents said employees frequently expressed concerns about the market competitiveness of their base pay. 

If the benefits are clear, why is there so much debate about pay transparency? There are two key challenges that can hamper an organization’s ability to optimize pay communications:

• Leaders, including the compensation team, need to agree on what exactly should be communicated.

• The organization has to be able to demonstrate its compensation programs are, in fact, fair.

The first step on the road to more open communication is to determine the types of information to be shared. There are two important questions that drive an employee’s assessment of whether she is paid fairly:

• Has my pay been determined fairly? 

• Is my pay fair relative to what others are paid?

Sharing information

One of the challenges with the notion of pay transparency is it means different things to different people. In its broadest sense, pay transparency is about being more open about compensation  and how people are paid.

But that doesn’t mean sharing the details of individual pay levels with other employees. This full disclosure approach represents the far end of the information sharing continuum and remains a rare stance on pay transparency. Further, the notion of full internal disclosure raises concerns about privacy that need to be considered.

But there is a lot an organization can share — to help build employee confidence in the fairness of such programs — without revealing the intimate details of everyone’s individual compensation arrangements. 

For example, organizations can move toward more open communication on compensation by providing more information on:

• how the organization seeks to differentiate itself as an employer

• its compensation philosophy, including its desired market positioning

• the design of salary or wage structures — which can range from sharing information about the pay range of an individual’s job, all the way to sharing the details of the full structure

• the approach used to align jobs to an appropriate pay range, such as whether the organization utilizes a formal job evaluation process

• the criteria used to calculate base pay increases, including how the organization links pay and performance, if applicable

• details of how incentive programs operate and the criteria used to calculate incentive awards

• details of how recognition programs operate and the criteria used to allocate recognition awards.

With consideration to the criteria for shaping pay fairness set out in the IBM research, addressing these types of matters will enable employees to understand how their pay is determined, how they can maximize their earnings opportunities, and how the organization delivers pay for performance.

So, why aren’t more organizations communicating more openly about their compensation programs?

First and foremost, organizations need to have a good story to tell. In cases where there are either no formally designed programs or a lot of discretionary decisions have been made, creating a lot of “exceptions” to the rules, an organization may not be able to actually show its compensation programs are fair. And they may not be.

The road to greater pay transparency — and the reaping of related benefits — may not start with a communication strategy but with an honest review of how compensation programs are designed and managed.

 Too much discretion may be undermining pay fairness and limiting the value of open communication. The most fruitful path forward, however, isn’t to remain silent about pay practices but rather to ensure you have a powerful and inspiring story to tell.