Is Your Compensation Program S.E.T.?

Fairness is such a valuable thing that no money can buy it. Alain-Renee Lesage

Each year around this time, national and local survey results are published, revealing actual and projected salary increases for the current and forthcoming year. HR, Compensation and Finance Managers among others, eagerly await this information for guidance on formulating their own salary budgets. For many of you involved in this process, I would venture to guess the same holds true.

As you go deep into the numbers, I encourage you to occasionally bring your head above the data to keep your eyes on the big picture. I know and understand that much time is expended on budgets – rightly so – but the same amount, if not more time needs to be spent on compensation program design and practices.

Climate and engagement surveys often show that compensation programs rank in the bottom third by employees when compared to other programs. Compensation programs and practices include but are not limited to: compensation philosophy statement, job descriptions, job grades, salary ranges, annual salary planning, annual increases, promotional increases, internal/external equity adjustments and salary related communications, both company-wide and one-on-one between manager and employee. Companies largely falter when it comes to compensation communications. In a recent study by WorldatWork (B Christie, 2020) found that over 60% of the participants did not have managers who were trained to effectively deliver pay communications.

Employees today want to see three main elements rooted in their company’s compensation programs and practices. First, they want a program based on a strategic (S) approach. Second, employees want to see equitable (E) pay practices. And third, they want decisions relative to their pay and pay in general to be transparent (T). Employees don’t only want to know what’s going to happen when it comes to their pay, but why it’s going to happen. The WHY is HUGE. Pay is personal so when changes are made, they want to be brought in on the reason behind the decision.

When it comes to your own company, you need to ask yourself if your compensation programs are S.E.T. Are they strategic, equitable and transparent? Keep in mind that compensation is part of total rewards, a strategy that is meant to attract, motivate, engage and retain employees. If any of the S.E.T. elements are missing, the likelihood of attaining the total rewards goals have been diminished.

1. Strategic. Do you have a compensation philosophy? If not, develop one. Employees want to know that what companies do relative to pay is based upon a strategy and approach that is consistently applied. Compensation philosophies provide the foundation upon which pay programs are built; defining how compensation is viewed and practiced. Link to business strategy, pay position against market, amount of base vs. variable pay and internal vs. external equity balance, are the key considerations in formulating a compensation philosophy.
2. Equitable.  Equity is coupled with fairness.  Employees today do not only wish to see equity and fairness in their compensation programs but demand it. Pay programs and practices perceived to be equitable and fair do the following: 1) increase quality of hire by 26%; 2) produces productivity in excess of industry averages by 19%; 3) incurs turnover that is 54% lower than average industry benchmarks (Salary.com, 2020); and 4) improves company reputation by 43% (Glassdoor, 2020).
3. Transparent. Pay and all things pay related has been traditionally handled in a secretive manner in many companies. That approach to compensation has been problematic, and now more so than ever. When compensation program practices and pay decisions are made without transparency, employees may begin to distrust management with engagement being negatively impacted.

Anecdotally, I have found in my years working in or consulting for companies, that many companies have a compensation philosophy and consciously make the effort to work towards equitable pay; but often they don’t want to talk about. My experiences are somewhat supported by other research findings from WorldatWork (2020):

• 42% of employers do not share information about how jobs are valued and compensated within the organization.
• When pay equity adjustments are made, 53% of organizations explicitly communicate to the employees that the increase is the result of a pay equity adjustment; 30% bundle it with other pay increases without explicit communication on the adjustment.

What is important to note is that “pay transparency, along with pay equity and pay strategy, plays an important role in delivering an authentic employee experience, which directly impacts employee engagement. (T Rahman, Mercer, 2020). Ensuring your compensation program and practices are S.E.T. is not only wise from a business perspective, but it is also the right thing to do on behalf of your employees.

Julie Caspar, President HR Hotline Associates