Willis Towers Watson’s 2016 Global Workforce Study has forged another link in the chain connecting perceptions of pay equity and fairness to employee engagement. The survey showed that compensation is still a top driver of employee attraction and retention (CEB’s Global Talent Monitor agrees), but also found that only a slim majority—53 percent—of employees believe they are paid fairly compared to people in similar roles at other organizations, and most organizations do not have plans in place to address this perception problem:
So far, many employers have not laid the ground work to ensure employees are paid fairly. The 2016 Global Talent Management and Rewards Survey, a survey of more than 2,000 companies globally, including 441 from the U.S., found only half of employers (52%) have a formal process in place to ensure fairness in compensation distribution.
The Global Workforce Study also measured whether employees understand how their base pay is determined and how their total compensation stacks up compared with others. Only about two-thirds of employees (65%) say they understand how their salary is determined, and less than four in 10 employees say they understand how their total compensation compares with that of the typical employee in their organization (39%) and with the typical employee in other companies (34%). When organizations begin to report on the CEO pay ratio and the pay of the median employee, these employees will not have the context to properly interpret those numbers.
This finding speaks to some of the trends motivating the increasing pressure on employers to be more transparent about what they pay their employees and why.
“Widely publicizing pay,” strategy professor Todd Zenger argues at the Harvard Business Review, “simply reminds the vast majority of employees, nearly all of whom possess exaggerated self-perceptions of their performance, that their current pay is well below where they think it should be.” As a result, it “unveils more than real gender-based inequities; it also fuels perceived inequities prompted by inflated self-perceptions.” So employees receiving salaries commensurate with their value to the organization feel underpaid relative to their higher-paid colleagues, which de-motivates them and makes them less productive, more likely to quit, and more likely to agitate for changes to the organization’s rewards policy:
For many years, Harvard managed the bulk of its endowment portfolio with internal Harvard employees but paid them much like fund managers employed by external investment management firms. The performance of these Harvard employees was quite remarkable during the early 2000s. As a result, some of these Harvard employees earned in excess of $30 million in yearly pay, due to performance that was truly exceptional against industry benchmarks. Their superior performance earned billions for Harvard, and all was fine until these pay outcomes became transparent to the Harvard community. This transparency set off a wave of opposition from students, faculty, and alumni alike. All efforts to justify these rewards, based on claims that payments to outside fund managers for such exceptional results would have been greater, fell on deaf ears. Harvard’s president at the time, Larry Summers, relented and flattened pay, pushing several fund managers to leave. Harvard also moved the management of a much larger share of the endowment to external fund managers, including many who had just departed Harvard. Transparency prompted lobbying for change.
Employers’ responses to these perceptions, Zenger adds, don’t tend to help employees: whether flattening pay, isolate employees with different pay patterns, or outsource those roles where pay diverges dramatically, as Harvard and other organizations have done:
In an era of increasing demands for transparency and fairness in pay, many employers are retooling their salary structures to make them more rational and less mysterious, the Wall Street Journal’s Lauren Weber discovers:
A look at how one company, web-services firm GoDaddy Inc., overhauled its pay structure illustrates how and why employers are trying to bring greater transparency and logic to compensation. Until recently, GoDaddy, which has headquarters in Scottsdale, Ariz., and offices in Kirkland, Wash., Silicon Valley and several other U.S. locations, was like many companies when it came to pay decisions. “The process was, ‘what did we pay the last person? Let’s pay the new person what the last person was making,’ ” said Matt Toeller, who arrived at the company in July 2015 to set policies to steer pay decisions for GoDaddy’s 5,000 employees. Some employees were paid too little, while others earned too much based on their location or experience. …
The company now pegs pay at the 70th percentile of the market rate for engineering roles, he said. To better match GoDaddy’s workforce to the broader benchmarking data, his team spent nearly four months mapping out job descriptions, which they used to create levels for each title—such as software development engineer—to reflect the range of workers’ skills and responsibilities. Each level has a pay grade with a wide salary range.