A new survey released last week by Willis Towers Watson illustrates the key factors driving US companies to reassess and change their compensation practices. In explaining why they were making these changes, employers cited cost, manager feedback, changes in the marketplace, and employee feedback as the most common motivations. WTW’s Getting Compensation Right Survey, conducted in April 2018, surveyed 1,949 employers worldwide, including 374 US employers whose total workforce comprises more than 5.2 million employees.
Among the US employers, nearly half said they were considering or planning on redesigning their annual incentive plans, while more than a third said they were changing criteria for salary increases. This highlights a trend we’ve been seeing over the past few years, in which employers are rethinking the traditional annual raise and opting for more targeted and differentiated increases or bonuses to reward and incentivize performance. Many employers also told WTW that they were refocusing performance management to include future potential and possession of skills needed to drive the business in the future, as well as introducing recognition programs to provide on-the-spot rewards.
One move many companies are making is toward greater pay transparency, with 53 percent of respondents saying they were planning on or considering increasing the level of transparency around pay decisions. Our latest research at CEB, now Gartner, also finds that transparency is a growing concern among rewards functions. One driver of this trend is the increasing amount of information available to employees and candidates about what other people are earning in their roles, both within their organization and at other organizations, through external sources like Glassdoor or LinkedIn.
In our employee survey, we found that 42 percent of employees who had consulted one of these online sources for pay information had thought about leaving their current employer as a result. These external forms of transparency are making it increasingly important for employers to be more forthcoming about their pay practices and take control of the narrative around compensation at their organization to get ahead of employees who might find (potentially inaccurate) information elsewhere and draw their own conclusions.
Our research also agrees that employees’ demands for fairness and clarity in pay decisions is making transparency more important than ever before. The engagement benefits of pay transparency come from improving employees’ perceptions of the fairness of their pay, their trust in the organization’s pay practices, and their understanding of how pay decisions are made. When employees understand and trust the decision-making process—and perceive that process as fair—their confidence in the process translates into better outcomes for engagement and retention. (CEB Total Rewards Leadership Council members can learn more about our latest research on transparency by registering for one of our upcoming executive meetings.)
WTW’s survey also looked into what companies were doing to address issues of pay equity. Nearly two-thirds of US respondents said they already had formal processes in place for deciding annual incentives, hiring decisions, starting salaries, and base pay increases, to guard against bias or inconsistency. Still, 60 percent said they were planning to take action this year to prevent bias in hiring and pay decisions, most commonly by reevaluating their recruitment and promotion processes, conducting a gender pay or pay equity diagnostic, and increasing communication of policies and benefits that promote an inclusive culture.
Like pay transparency, pay equity is a process improvement for which there is no “one-and-done” solution, our research has found. The longer pay gaps are allowed to persist, the wider they grow and the more expensive it becomes to close them, so employers have a bottom-line interest in addressing these gaps sooner rather than later, as well as putting safeguards in place to proactively prevent them from opening up again. To tackle this problem, compensation executives and HR must identify and address all the points in the employee lifecycle where these gaps can appear, from starting salary offers to performance decisions, promotions, raises, and bonuses.
CEB Total Rewards Leadership Council members can read our full study on pay equity here, and can also learn more about how to maximize the impact of pay transparency through more focused communication, as well as how to reward performance accurately and communicate the link between performance and pay.