Pay transparency was one of the hottest topics for Total Rewards professionals in 2022, and there’s no stopping that momentum in 2023. Here’s what you need to know about what’s changed — and steps you can take to rethink your compensation program design in the era of pay transparency.
A new compensation mindset
Knowledge in the hands of few creates a dynamic where the “knowing” are in control. For a long time, employers determined the business models, organizational structures, jobs, and what they could afford to pay — and kept most of that information to themselves. Now that employees have more information about pay in their hands, the power dynamic has shifted.
This presents a challenge to employers exhausted from crisis after crisis and trying to attract and retain employees at a time when trust is at an all-time low. But it also presents an opportunity to engage employees in a new way — because pay transparency is so much more than simply sharing ranges for jobs. It’s how you reveal to the world what your organization values, what you expect from employees, and what you provide in return.
In the past, we called this the employee value proposition. Today, it’s the pact you create with every human being who works for your organization. And with this pact comes a new way of thinking about total rewards. As organizations look at what it takes to be responsible, sustainable, and deliver long-term value, they need to look beyond base salary and think about how to incentivize, motivate, and partner with employees to achieve those business goals.
This should be the new mindset for pay transparency. Challenge yourself to think critically about rewards in this broader context and ask yourself: “At the most fundamental level, what do we want our current and prospective employees to think about how we pay them?”
Pay explainability: A new requirement for compensation program design
Decades-old compensation programs were meant for managing compensation — not communicating about compensation.
Most folks in Total Rewards are halfway to creating ranges for posting before they’ve fully assessed how they are currently delivering pay. It makes sense because they need to quickly comply with continually expanding pay range transparency laws. But moving too fast can cause problems and erode trust.
When an organization posts ranges, employees will have questions about why they’re paid what they’re paid, why they are where they are in the range, how they can move up, and how their pay is determined.
“Pay explainability” — the answers to those questions above — are essential in the era of transparency. Total Rewards folks have long struggled with communications around pay, spending countless hours training and explaining programs to HR, leaders, managers, and employees. It’s time to realize that to be effective in the era of transparency, programs also have to be easy to explain. And employees need to be able to clearly see that their pay is consistent, fair, and competitive.
Take the time to thoroughly assess your compensation programs so you can articulate why you pay what you pay, better understand everything you will have to explain, and pinpoint where you may need to change the tools and tactics you use to deliver and discuss pay. Here’s how.
1. How do you currently pay people?
To figure out if your compensation programs are working as intended, first get clear on how they’re designed. Ask questions like: How is compensation administered across the organization — for example, do you target different market percentiles depending on the job, region or business? Where do you have different structures by location? What are your range widths and where do you target jobs in the ranges?
You can use this information as a starting point to decide what to communicate, but don’t stop there.
Position-in-range analyses and pay equity analyses will help you understand how you are paying people in practice and, if it is not in alignment with how your programs were designed, how much they need to change. You’ll gain valuable insight, such as:
- Are employees where you want them to be in the structures — for example, are those newer to the job lower in the range and most other folks at midpoint?
- What employees are low in their ranges and well under pay predictions from the pay equity analysis?
- What jobs are, on average, paid below where you’d expect? Are these also jobs where you have openings you’re trying to fill?
- Are the things you say drive pay —such as job level, experience, or performance — actually driving pay as expected and consistently in each job family?
- How are geographic differentials playing out across hybrid or location-specific roles vs. remote roles? Is this sending the intended message about how you value remote vs. in-location work?
2. How do you currently talk about pay?
With the above information in hand, now you’re ready to dive into a stakeholder analysis to see how you’re currently talking about pay — and where you want to get to in the future. Create a table that lists your people along the left-hand side, and a timeline of current state, transition, and future state along the top, like the example below.
Compensation Communications: Stakeholder Analysis
Start with your current state: how do different groups of people within your organization talk about pay? Answer the questions below for each group and capture your responses in the “Current State” column.
- Leaders: Do executives talk about pay and other elements of Total Rewards? When and how often? What are the key messages?
- Managers: Do managers communicate your compensation philosophy and programs confidently? How often? What tools do you provide to help them explain pay?
- Employees: What do you mean when you tell employees you pay them competitively or fairly? Do you explain how you define the “market” and that there may be differences by role, business segments, or location? Do you share ranges and where someone’s job falls in the range
- Recruiters: What guidance do you provide to recruiters? How much do they negotiate with new candidates? How are final offer decisions made?
3. How do you want to talk about pay moving forward?
The goal of Step 3 is to define your ideal future state and prepare to communicate, listen, and change. You need to decide how you want to talk about pay moving forward before you decide how you’ll get there (i.e. “Transition”). This is a great time to engage with a broader team across HR, Legal, and management to get different perspectives on the future state and collaborate on how to achieve it.
Here are some things to think about to help you fill in the “Future State” column.
Leaders: What is the “why” for more transparency? Leaders set the tone for the organization’s transparency strategy — pay transparency is a way to align with the overall business strategy and show how they value employees. In the ideal Future State, what will transparency look like? Speak to how everyone will:
- Understand how they are rewarded for their contributions to the business;
- Be confident that they are rewarded fairly and competitively; and
- Know how they can earn greater rewards and move into higher-paying roles.
Managers and Employees: Managers are on the front lines of pay transparency. Empower them to clearly explain pay so employees understand why they’re paid what they’re paid and opportunities to advance. In the ideal Future State, how can they achieve success? Speak to how everyone will:
- Understand how their work links to the work of the team, the function, the business;
- Know the specifics of how their contributions are rewarded and how they can maximize rewards; and
- See pathways to greater skills development and growth with the company.
Recruiters: When talking with recruiters, emphasize the importance of using candor and clarity about pay to attract candidates. How can they make offers they’re confident will attract the best talent? Speak to how everyone will:
- Believe offers to be competitive and fair; and
- Understand the total potential of what they can earn, like opportunities for incentives and growth.
4. What is your path to the future?
This brings us to “Transition.” Here, you do the hard work of deciding what needs to be done to reach the Future State. Focus on where the differences between Current State and Future State signal a disconnect between intention, design, and practice.
For example, organizations that are transitioning from a current state of wide ranges to a future state of narrow, more job-focused ranges will need to make changes to the structure — which will have implications on how pay is managed. A successful transition should include the following:
- Use analytics to evaluate, benchmark, and pressure test the construction of the new ranges and implications for employee pay. This requires evaluating market data for individual roles and how people are currently paid in roles across the range to establish smaller groups of jobs in smaller ranges. It also requires that you conduct a pay equity analysis of proposed adjustments to make sure any changes to individual employee pay as a result of moving to the new ranges are made equitably.
- Ensure pay explainability. Everyone in the organization needs to be on the same page for how to make pay decisions using new ranges. This includes: how the ranges were created (that is, why jobs are grouped in ranges); what changes will be made and for whom; and new guidelines for pay decisions.
- Create a feedback loop through pulse surveys, focus groups, and other tools. This is critical to ensure employees understand the changes and that managers adopt them.
Refining your compensation programs goes hand in hand with defining your pay transparency strategy. Remember that this is about more than posting ranges. In the era of pay transparency, this is about creating trust in your partnership with employees in achieving your business goals together.
Want to learn more about how to build employee trust by owning your workplace equity narrative? Our 2023 Workplace Equity Communications Playbook linked below offers real-world examples and strategic advice.
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