Preparation, context, and support are key

As we enter the new year, it’s fair to say that many employees are anticipating the annual performance and pay increase discussion. Unfortunately, even the best of managers, those who love coaching and counseling employees, are likely not looking forward to having to lead that discussion.

There have always been inherent challenges in the annual increase and performance management discussions. Limited budgets, forced rankings, or an approval process that leaves the manager in the dark as to how their recommended increases were modified are just a few of the obstacles that can leave a manager feeling less than confident this year when delivering the annual increase news to employees.

Some organizations have attempted to simplify this by separating the annual performance and pay increase discussions. The thought is that the separation allows employees to focus on performance feedback rather than zeroing in on “How much more pay am I getting?” At least for now, though, annual increases and performance reviews are still connected in most organizations. So, separating them? This could cause managers to have two anxiety-inducing conversations, rather than one.

Alas, talking about pay and being able to address employees’ questions are necessary for many reasons. Discussing accomplishments and opportunities for growth and connecting them to pay positioning and increases is very important, particularly in a company that espouses pay for performance as a compensation driver.

Not only is pay transparency legislation being introduced in several provinces, but increasingly it is becoming an employee expectation, making it even more important that you prepare your managers to be able to provide employees with accurate pay information.

Here are some things to consider when preparing your managers for pay discussions with their employees.

Take time in advance to prepare

Assuming you are not brand new to your role, you’ve likely identified a few things about the compensation calendar at your organization:

1. It always takes longer than you think to make decisions and get approvals (don’t worry, it’s not just your company!)
2. There is an ebb and flow to the compensation activities that take place throughout the year

Begin preparation and planning for your annual increase (and performance) process early! Take advantage of the slower times in the year to assess alignment, identify administration improvements, and otherwise examine your process. Recognize that any changes you need to make to either employee pay or the annual increase process itself will likely need buy-in from key stakeholders and to follow a chain of approval. That takes time.

Listed below are a few things to consider early on in the year to better prepare for transparent pay discussions between managers and employees.

Learn from prior years

You know how you’re frequently asked to complete a customer satisfaction survey after a retail or telephone transaction? Why not do something similar after arguably one of the most important annual compensation management projects — the annual increase and performance management process?

Check-in with managers, or a subset of managers, to see what went well during the annual increase process and what could be improved. This can be done through a quick survey, digital focus groups, or even in-person discussions. Use their feedback to improve the process in the coming year.

Employees can be another source of feedback. In particular, asking them how they feel the process went will likely help you identify improvements in training managers or in communication.

Look at the approval workflow

You’ve heard it before. A manager is discussing the annual increase amount with their employee and says, “I don’t know, it’s not the percentage that I submitted, but this is what came back from HR/Leadership.” Gasp! Should they say that? Absolutely not. Not only does it affect their authority as a decision-maker when it comes to pay, but it creates mistrust of the whole process in the employee’s mind. Unfortunately, it happens more often than it should.

One piece of the annual process that can lead to this uncertainty is the role your managers play in determining how their budget is distributed to employees. How much discretion they have and how the final decisions are made and communicated back to the manager will all impact their sense of ownership in determining the annual increases.

Ensuring they understand why any changes are made to their recommendations is critical to helping them confidently deliver the increase message to employees. For example, a manager submits their recommended increases, which includes a 3.5% increase for a particular employee. When that manager is given their final approved increases, the aforementioned recommendation has been reduced to 3.0%. They are then directed to communicate that increase to the employee, with no additional context.

Don’t let this happen. Build into your process clear expectations and guidelines for the manager to use when developing their recommendations. Create a communication mechanism that will provide the manager with context for any changes that are made to their recommendations.

Alignment to compensation drivers

How much and what you can ask managers to discuss with employees about pay really depends on how confident you are in your current compensation management and administration. Can you be transparent and not worry about misalignment? Does how you are paying employees currently match up with the compensation philosophy you communicate?¹

Mid-year or during some period in which work is slower, set up a way to monitor how your employees are distributed throughout your pay ranges and how that aligns with your compensation philosophy. Of course, this is much easier if you have a compensation management system in place, but it can be done fairly easily with spreadsheets and a few simple formulas.

For example, if one of the drivers of pay in your organization is time in position (experience in the current job), then take a look at how employees with longer time in position are paid within their ranges versus those with less time in position. You should see that those with more experience are on average positioned closer to the midpoint of the range (or market reference point) than those with less. If performance is a compensation driver, you’ll want to do a similar assessment using performance. Both assessments can be conducted formulaically to identify average and outliers. Hopefully, on the whole, you are aligned and fixing outliers is something that can be done either in advance of, or in connection with, the annual increase process.

These, of course, are just examples of what to assess in advance of the annual increase process, particularly now in the age of pay transparency. There are many compensation formulas and metrics that can be used in regular reporting to keep an eye on whether or not you are aligned.

The goal is not to put managers in the uncomfortable position of stumbling into pay alignment issues during their discussions with employees. Be prepared to implement a plan to rectify any issues in advance.

Provide your managers with context

According to Kevin Poff, Partner and Zone Practice Leader for Mercer, employees and managers often enter pay conversations with very different reference points. They're not on the same page right from the start.

Managers likely already have compensation data, an understanding of the company’s financial position, and a perceived value of a particular employee based on performance and role. Managers may also have an idea of how other employees are being paid, which is information that is not available to the employee.

What do employees have? Well, it used to be that they have the internet and, likely, a few peer pay comparisons based on who they define as their "peers."

Now, they’re seeing a lot more job postings with pay ranges. Depending on the policies and locations of the company, they could be seeing their own organization’s pay ranges/structures.

In order to provide the manager with the context and education they need to bring their viewpoint closer to that of the employee, at a minimum managers should be provided with:

1. Your company’s compensation philosophy and an understanding of what it means
2. Merit and total increase budget and an explanation of how that’s determined
3. Salary structure that is used to manage pay, the applicable ranges, and how the structure is determined and maintained
4. Factors used to determine increase percentage for each employee (e.g., performance rating and position in range)

With this understanding, the manager can provide accurate guidance and knowledge to the employee, focusing on facts.

Support managers and employees

Pay transparency is becoming entrenched in the United States and its importance continues to grow in Canada. It’s something that needs to be considered in all total rewards communications for both managers and employees. An employee's understanding of how pay is determined should not only come from the annual conversation with managers. As HR, it’s our goal to include information around the compensation philosophy, relevant salary structure and range information, connection to performance, and incentive information as part of the employee value proposition we present to employees from the time they apply for a job. Making pay more of an open conversation will take some of the burden off of managers.

Consider incorporating the following into relevant employee communications:

• How does the company determine pay?
• How are pay increases determined?
• What role does cost of living play versus cost of labor?
• How does the company establish pay increase budgets?

Of course, as a member of the HR team, you should make yourself available as a sounding board and resource for managers. Help them prepare for the conversations with employees and then address questions and issues after the fact. An employee often will need a follow-up conversation to fully embrace the messaging provided and managers need to be prepared for that.

A final thought

One of the biggest mistakes that managers make is probably underestimating the personal nature of these pay conversations and realizing that employees are often uncomfortable having these conversation too. Facts are important and managers need to remain calm and professional. But, remember and try to connect with the fact that employees are not thinking about compensation analysis, formulas, HR metrics, or budgets. They may be thinking about paying for food, college, or a vacation, or caring for their aging parents.

Looking for more insight on how to support your managers in their pay discussions? Give Mercer a call at 1-855-286-5302.

¹ If you don’t have a compensation philosophy, that’s where you need to start! Mercer has several articles that can help you think through the different elements and options here.