Correcting employee pay perceptions

Guest post from Ruth Thomas, Industry Principal and Senior Consultant, Curo

Employees’ perceptions of how they are paid often differ from the reality. And when it comes to retention we also know that one of the most compelling facts about employee turnover is that when an employee leaves an employer for reasons relating to pay, it is not over the absolute value, but over whether they believe they are paid fairly relative to their peers and the market. Perceptions of fairness are critical when it comes to pay, engagement and talent retention.

A joint Harvard Business Review study with Payscale of over 71,000 employees back in October 2015 revealed just how big gaps in pay perception can be. They found while the majority of employees paid below market concurred with their perception of market relativity, well over half of employees paid at market felt they were paid below market and even for those employees paid above market, still over a third believed they were paid below market and only 21% aligned with their actual market position.

Similarly, Glass Door’s Global Salary Transparency Survey from 2015 covering employees across seven countries (United States, Canada, United Kingdom, France, Germany, The Netherlands, and Switzerland) highlighted that many employees don’t understand how their pay is determined. A whopping 69% wished they had a better understanding of what fair pay is for their position and skill set at their company and in their local market.

What’s evident is that unless you share information with employees it’s likely their perceptions will not align with reality and they will find it hard to assess whether pay is fair or not.

But proving fairness is hard and can only be assessed if there is an element of transparency. But how do you decide what to be transparent about? A good starting point is to understand the three things employees most often cite they want to know about their pay:

How their pay was determined;
How they can influence their pay;
How it compares with others.

Explaining how you make pay decisions is critical. So if you use market pay data, then explain to employees how market studies are conducted, what your market positioning is and why. If you use job grades with associate pay ranges explain how those relate to skills and experience, where an employee sits in the range and how pay progression works. Even if decisions are made on a wholly discretionary basis explain how you set pay budgets and what guidance you give to managers when making pay decisions so employees can understand what they can do to influence their pay.

Many companies struggle with how much to communicate and there is definitely a continuum here. Where you sit or how fast you progress will very much depend on your culture and goals as well as historical pay approaches. But not having any methodology is obviously going to make transparency hard.

Another critical success factor when it comes to tackling employee perceptions on pay is to make sure you empower your line managers with the information they need to make and communicate pay effectively. Pay conversations can be uncomfortable, mainly because pay still has very personal implications for employees. It impacts their livelihood and lifestyle and it can also quantify their worth – as rate of pay is determined by the skills, experience and performance an employee brings to the table – so it kind of represents how much you value them. Managers are often caught in the middle of HR and employees when talking about pay, they have to follow strict guidelines, but they also want to keep their teams happy and engaged. Most are unprepared for detailed pay discussions. In Reward we think we have done our job if we have sent them a nicely articulated policy or briefing document – but practically we don’t often prepare them for actual pay discussions; especially for push back from employees. The following tips for managers are useful:

So communicating with employees is critical or they may come up with their own perceptions of how their pay is determined and make their own assessment of fairness. Even then fair pay isn’t always provable, can be too emotive to be quantifiable, and it definitely dynamic. However, if you can demonstrate that your policies are equitable and that the system for awarding it seems fair you stand a better chance of tackling those inaccurate perceptions. It’s worth noting too that top-performing organisationsorganizations have greater aspirations for being transparent with their pay practices: 62% of top performing organisationsorganizations aim to be transparent about pay in 2018 (vs. 56% of typical) according to Payscale’s 2018 Compensation Best Practices Report.