There are very few talent-related issues that generate as much attention as compensation—in particular, how compensation compares among all the various employees at an organization. Historically, companies have preferred not to share information about compensation out of fear that those who are on the bottom half of the compensation chart will become disappointed and disengaged when they learn that they are earning less than their colleagues. This fear has been a major factor in the business community’s objection to the CEO-employee pay ratio reporting rule that came into force in the US this year: When you publish the salary of the median employee, half your employees inevitably discover that their pay is “below average.”
This idea of hiding compensation for fear of disengaging employees is a relic of the past, however. The reality today is that employees can get a sense of how their compensation stacks up compared to their peers through a growing number of websites that share this information publicly, such as Glassdoor, PayScale, or Salary.com. In other words, employees can already find out how their compensation compares to others and are already talking about it; the question for senior leaders is whether they want to participate in or shape these discussions.
As technology has forced greater transparency in compensation, some companies have decided to actively manage the conversation by proactively revealing to their employees what their co-workers, managers, and senior leaders earn. The New York-based tech company Fog Creek Software is one such organization; eight months ago, it gave its three dozen employees a chance to see what their peers were making. On Bloomberg’s “The Pay Check” podcast this week, Rebecca Greenfield checks in with Fog Creek to see how it went:
Fog Creek’s chief executive officer, Anil Dash, believed … that salary transparency would shine a light on unfair pay practices and ensure things stayed that way. Dash, an entrepreneur, prominent tech blogger and prolific tweeter, is a rare, pro-union, tech CEO who also believes in the old-guard internet principle that information wants to be free. “Transparency is not a cure-all and it’s not the end goal, it’s a step on the way to the goal, which is to be fair in how we compensate everyone,” Dash said. …
Employers in India are abandoning the traditional practice of across-the-board annual raises to more targeted compensation strategies in which employees are increasingly expected to earn their raises through high performance or professional development, Saumya Bhattacharya reports at the Economic Times:
Last month, when Aon India Consulting announced the findings of its salary increase survey for 2017-18, average increment was estimated to be 9.4% for the year, almost the same as last year. From 2014 to 2018 (projections), average salary increment has declined from 10.4% to 9.4% — with the focus on performance becoming sharper each year. With the ability to learn new skills getting added to the high-performance matrix, the definition of top performers is also set to change.
Top performers, according to the new definition, would get an average salary increase of 15.4%, about 1.9 times that of an average performer, said the survey. … Experts say the phase of a large chunk of employees getting 14-15% increments is over. Ten years ago, you would have 20% of the organisation categorised as high performers. This has shrunk to 7.5% of the population in a company, they add.
Chris Martin, Director of Research at PayScale, showcases the findings of a recent study his company conducted based on survey responses from more than 500,000 US employees. The study sought to gauge the impact of various criteria on employee engagement and intent to stay in their current jobs:
Two variables stood out from the pack for both outcomes: whether an employee feels appreciated at work, and whether they feel their organization has a bright future. Employees who feel unappreciated or who think their organization isn’t going anywhere are less likely to feel satisfied at work and more likely to plan on seeking a new job in the next six months.
Although they don’t align precisely, PayScale’s findings here underline a key insight from our Global Talent Monitor at CEB, now Gartner. This quarterly report provides workforce insights on global and country-level changes about what attracts, engages, and retains employees, based on data from more than 22,000 employees in over 40 countries. (CEB Corporate Leadership Council members can peruse the full set of insights from Global Talent Monitor.)
What our latest global data show is that while compensation is the most common driver of talent attraction both worldwide and in the US, other factors are nearly as important to employees in deciding whether to take a job, including stability (related to the future prospects of the organization) and respect. Indeed, respect has been growing in importance as a talent attraction driver over time, especially in the US, Southeast Asia, and India. When it comes to drivers of attrition (what compels employees to quit), compensation is outranked both globally and in the US by future career opportunity, while people management problems and a lack of opportunities for development are also common factors in employee attrition.
The other interesting finding Martin highlights from PayScale’s study concerns employees’ perceptions of pay practices:
Surveys of salary budget projections for 2018 show that US employers are planning to hand out raises of 3 percent on average, similar to the previous few years. The latest survey from Willis Towers Watson concurs in this regard, Bloomberg’s Rebecca Greenfield reports, finding that 98 percent of employers plan to raise salaries this year, with most employees getting a raise of around 3 percent. However, WTW also found that top performers are getting a bit more than the rest:
Employers are cautious about giving raises, and even as some complain of trouble hiring as the job market tightens, few feel pressure to pay their employees more, said Sandra McLellan, a researcher at Willis Towers Watson. A sliver of employees will, however, see a bigger bump on their pay stubs this year. So-called star performers, those who score highest in performance ratings, can expect, on average, a 4.5 percent salary bump.
Back in June, General Electric hinted that it was considering doing away with annual raises and replacing them with some sort of more targeted system. If it were to do so, GE would be abandoning a practice followed by the vast majority of US employers, some 90 percent of which give out raises to all employees on a fixed annual date, while only 1.2 percent of companies increase base pay on a discretionary timetable. However, other organizations are also having second thoughts about the annual raise, which they say is too small to meaningfully motivate or differentiate employees, Rachel Emma Silverman discovers at the Wall Street Journal:
Average merit raises for U.S. workers have hovered around 3% for the past five years, as employers have kept the budgets for raises relatively low, despite improving labor markets. Pay surveys report companies expect few changes next year if inflation stays low. That doesn’t give companies much to work with. Moreover, managers are reluctant to increase base pay further because higher payroll costs could result in heftier prices for customers, says Tom McMullen, a senior compensation partner with Korn Ferry Hay Group.
Laura Sejen, managing director of talent and rewards at consultancy Willis Towers Watson, urges employers to “eliminate merit raises as we’ve known them” and focus on meaningful bonuses for high performers. … “The annual raise is like smearing peanut butter one millimeter deep for everybody. It’s better to smear the peanut butter where you see really strong contributions happening,” says Kris Duggan, the chief executive of BetterWorks, a three-year-old management software firm.
Replacing regular raises for everyone with bonuses only for high performers carries risks of its own, however, as Bloomberg’s Rebecca Greenfield notes:
Meaningfulness is a key theme that has come out of recent analysis we’ve done on incentives and their impact on employee behavior. Many organizations put tremendous resources—from complex performance management systems to detailed pay guidance provided to managers—into ensuring that fine-grained differences in employee performance are reflected in differentiated rewards on the back end. But what we’ve found across different employee populations (sales and non-sales, junior and senior), in different parts of the world, and across different compensation and reward vehicles, is that fine-grained distinctions simply don’t matter. To encourage employees to make outsized contributions to their organizations, rewards must, most of all, be meaningful.
Three examples illustrate the importance of this theme:
The first is about differentiation. When we analyzed the impact of differentiation on employee performance, we found that small differences had little effect. Take bonus payouts as an example: Bonus payouts for high performers need to be at least 50 percent greater than the payout for the average employee to have any meaningful impact on employee behaviors. Anything less than that simply isn’t perceived as meaningful by the recipient.