Corporate leaders often make this comment when they’re asked about their workplace culture. But, guess what? No matter how often and how fervently they insist that they value their employees, many employees don’t agree. There’s a significant disconnect between the way they feel they’re valued and what management believes.
The 2019 Compensation Best Practices Survey, carried out by compensation software and data company, Payscale, delivered some hard numbers that prove this point:
- 44% of employers were convinced their employees felt they were paid fairly; only 20% of employees agreed.
- 64% of employers thought their employees felt appreciated; only 45% of employees felt that way.
- And a whopping 77% of employees said that the way compensation was determined was not transparent.
In an Ernst & Young survey, the top two reasons employees gave for having “very little” or “no trust” in their employers were financially related. In this survey, some 53% said that employee compensation was not fair while 48% said employers did not provide equal opportunity for pay and promotion.
All these numbers should ring alarm bells. If members of your team don’t think they’re getting paid what they’re worth, if they believe their work is not valued, or they say compensation decision-making is not transparent, they are likely to be disgruntled and demotivated
The financial impact of demotivation is significant, costing companies as much as $450 to $550 billion a year in lost productivity through poor performance and a high rate of absenteeism.
The majority of today’s workforce (millennials) and the future of the workforce (Gen Z) place a greater emphasis on a company’s values and culture than their predecessors. That said, they still want to be appreciated and rewarded for their contributions — which includes financial benefits.
What Do You Value?
Let’s get specific.
If you value teamwork, why not award bonuses to individuals who unselfishly help their peers?
If you value performance, don’t give everyone the same raise.
If you value creative thinking and innovation, basic remuneration, pay raises and bonuses should reflect performance in those categories in addition to the achievement of narrow, results-oriented metrics.
If you take pride in being a fast-paced, deadline-oriented entity always turning on a dime to make things happen for a client — it’s inconsistent to only have an annual pay review.
If the company is expanding its sales organization, commission programs should be emphasized.
If quality or efficiency are a competitive advantage, employee pay should support those initiatives.
“By tying benefits and compensation to the organization’s culture, employees are hired and promoted by determining who best supports the culture and values. These employees become an organization’s leaders and shape its future,” says Ken Troy, Human Capital Services Director, at Grant Thornton.
But major disconnects persist. About half of companies agreed that compensation drives engagement — but only 26% changed their compensation strategy as a result. A lack of transparency creates another major barrier. According to LinkedIn’s Global Talent Trends 2019 Report, only 27% of HR and hiring professionals say their company shares salary ranges with employees or candidates.
As Payscale points out, “The way you pay says a lot about you as an organization. Compensation should be a reflection of and an extension of your culture.”
At the end of the day, the labor market is competitive. Forty-seven percent of organizations surveyed say that today’s strong job market has increased their turnover rate — but they’re not stepping up base pay to retain talent.
To help hire and retain great talent, you need a compensation strategy and structure. People are critical of your organization’s ability to accomplish anything, and the cost of labor is also often a company’s single biggest expense, running anywhere from 15% to 45%. In other words, you’re already making a big investment in your people, so make that investment effective.
Developing the Right Compensation Strategy
When organizations invest considerable time and money into identifying and building the right culture to give them a competitive advantage but neglect to consider the role compensation plays, they miss a significant opportunity to reinforce and sustain that culture.
Don’t misunderstand. Finding the right compensation strategy for your company’s unique situation is challenging. There isn’t a “one-size-fits-all” solution. Market data, industry benchmarks and application of best practices are useful, but also too generic.
Luckily, there are four pillars that are universally necessary for designing a compensation structure that works for your business.
You are never going to convince anyone that people are your most important asset if you do not pay them fairly. To ensure fairness, you must:
- Monitor the market frequently – Determine what other companies pay annually. Do this even more often for highly volatile, hard-to-fill jobs. Top-performing, fast-paced organizations also deliver spot and project completion bonuses.
- Know what your mission-critical jobs are – Pay more for these.
- Reward superior performance – Have a solid talent review system in place to identify top performers, especially those in mission-critical-roles.
- Correct imbalances – Conduct racial and gender pay equity analyses and take action where needed. It’s critical you communicate those plans to employees.
According to the Payscale survey, 73% of organizations have a variable pay plan in place, and 23% of top-performing organizations have increased variable pay to improve retention.
Variable pay is only effective when there is close alignment with behaviors you want to drive and reward. Alignment needs to occur in three key areas:
Incentivizing individual or team performance will drive very different behaviors. So will rewarding the wrong behaviors.
You want to award top performance, but you also have to consider how numbers are attained. For example, do you have a manager who kicks their goals out of the water, but also has high turnover and lots of employee relationship issues? Think about the message you send when this manager is rewarded handsomely.
Are collaboration and teamwork highly valued, but your pay structure rewards individual results? Consider a team bonus. If the reward at the end of the project is individual in nature, employees won’t put the needs of the team first.
Are you profit-oriented, revenue-driven, or innovation-focused? It’s easy to say you want all three, but which is your foundation?
- If you are profit-oriented, figure out ways to reward employees for achieving the KPIs that drive profit. For example, earning repeat business from existing customers is usually less expensive than acquiring a new customer. How can you reinforce this through pay?
- Are you more revenue-focused? In that case, what behaviors drive revenue growth? What is the relationship between customer satisfaction and revenue? How can you use pay to reward the right customer-centric behaviors?
- Maybe you’re more innovation-focused. Innovation takes time and requires risk-taking. Do you punish employees for making mistakes or incentivize them for sticking their necks out?
Long-term vs. Short-term Focused
This may vary depending on the employee’s position, but in general, if we want people to focus on long-term goals, incentives need to balance with that perspective. Equity, stock bonuses, grants and gainsharing (a share of the value generated by performance improvement) are solid approaches for employees of all levels. Executive compensation is more complicated so non-qualified, multi-year vesting plans should be considered.
A lot of organizations say they have an open-door culture, or that communication is a core value. But is that truly the case? Pay transparency can create more trust and fairness. Younger employees often share what they make with colleagues anyway.
- Transparency does not mean you have to share how much an individual receives, but it does mean sharing your strategy and rationale.
- Beware of policies forbidding employees to share their pay with colleagues. Such policies are not only outdated but illegal under the National Labor Relations Act.
- Help employees understand the concept of total compensation. Their pay is base pay, variable pay and benefits. Share this information with them, especially in this day and age of rapidly rising benefit costs. Benefit statements are an effective communication tool to do this.
- Make peace with your company’s increased transparency. It’s a long-term effort, and it’s sustainable. There are a growing number of companies that share individual pay information for a variety of reasons, including Buffer, Glitch, Whole Foods and Starbucks.
When organizations consider pay as a critical component of their culture strategy, they are more likely to sustain the culture they have worked hard to realize.
Mykkah Herner, a compensation and human resources professional, puts it extremely well: “They say when you really care about something, you should put your money where your mouth is — and I totally agree. To be competitive, get the best talent, and really be a great place to work, organizations have to put their compensation where their culture is.”
Ideal Outcomes, Inc.