Strategies for discussing compensation openly and confidently

As Human Resources (HR) professionals, or "People Managers," you know that one of the more anxiety-inducing aspects of the job is talking to employees about pay. Managers find it uncomfortable and often don't feel confident when explaining how compensation practices are determined. Pay conversations — especially when they don’t end with a pay increase - are never easy.

Few and far between are the managers that look forward to talking to their employees about pay. Add in high inflation and this year’s conversations are likely causing heartburn.

I asked Kevin Poff, Mercer's Career Business Leader for Southern California with over 16 years' experience in rewards practice, for some tips on pay conversations.

RA - Hi Kevin. Thanks for taking the time to speak with me.

KP - No problem, Rebecca. I appreciate the opportunity. This topic is more important than ever.

RA - Kevin, with your clients, what are the most common challenges managers face when explaining compensation to their employees?

KP - Often, employees and managers enter pay conversations with different reference points. They're not on the same page right from the start. The manager generally comes in with much more background — or they should!

Managers may have compensation data, financial concerns, a perceived value of that particular employee based on performance and role. They may also have access to other employees' pay, which isn't available to the employee. Employees have the internet and, likely, a few peer pay comparisons based on whom they define as their "peers."

Another challenge is that managers may have long-term salary plans; for example, they may plan to give the employee a small raise now and adjust pay further down the road as part of an equity review or market adjustment. But the manager probably can't share this with the employee because they don't want to overpromise or commit to something in the future that isn't a sure thing.

Pay is rarely (if ever) a driver of employee satisfaction, but it is often (or always) a driver of dissatisfaction. Employees may not be "happy" with their pay, but if they think it is fair or appropriate, they may be "content."

RA - With all that in mind, how should a manager prepare for a compensation discussion with an employee?

KP - First, the manager should get all the facts. This includes attempting to understand the employee's point of view and concerns, and anticipating what they know. It’s more than likely managers will be asked how the company determines the annual increase budget as well as how it compares to the rate of inflation.

Second, predict the employee's frame of reference — beyond "more," what is the catalyst for the conversation? What is the employee's pay history? Did someone else get a raise and now the employee feels left behind? Are there broader pay issues circling the company (e.g., gender pay gaps)? Are they in a position to change jobs or even careers?

Third, be prepared for the employee to leave the conversation dissatisfied (but, hopefully, not disengaged).

Lastly, be prepared for a follow-up conversation and suggest one proactively. These are difficult conversations, and employees may seek outside support (co-workers, friends, family). Those supportive conversations, where friends and family are trying to help by asking questions like, "Did you ask about X?" or commenting, "That's not right," may trigger the need for another conversation — and that's a good thing. More dialogue allows you to continue to listen, make the employee feel heard, and reinforce your point of view and message.

RA - Great advice and some practical steps that managers can take. What do you think is the number one mistake managers make when talking to their employees about compensation?

KP - I think it's probably underestimating the personal nature of these conversations and 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, compa-ratios, HR metrics, or budgets. They may be thinking about paying for food, college, a vacation, or taking care of their aging parents.

RA - Kevin, what can the organization do to better prepare managers for these conversations?

KP - Start by creating more predictability and transparency around pay.

RA - And what do you mean by that?

KP - Employees shouldn't have to spend time wondering what will happen to their pay. And their understanding should not all be based on communication from their manager. The organization should be transparent in communicating a compensation philosophy, including things like:

• 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?

That said, let's be honest, this is an aspirational goal. Managers often don't control the timing of compensation reviews or the amount of pay increase budgets. Therefore, it can be difficult for managers to communicate effectively or even reinforce what the company publicizes more broadly.

RA - And, Kevin, you're based in California, a state that has passed a pay transparency law. What are your thoughts on pay transparency? Are the laws we're seeing in CA and elsewhere going to become standard nationwide?

KP - Yes. My perspective is that companies should operate as if the pay transparency laws are national, even if they don't formally affect their state at present. First, the objective of these laws is to reduce the gender pay gap by prohibiting employers from asking for prior salary information. Shouldn't that be a company priority even if it's not the law? Second, HR leaders should take the enactment of these laws (or the risk of them) as a catalyst and accelerate their own transparency priorities. What better time than now?

RA - Kevin, thank you for sharing your thoughts today. This is some great information for our iMercer audience.

Looking for more insight on how to support your managers in their pay discussions?

Mercer's various compensation planning and global publications are a great place to start.

If you have questions, contact us by emailing surveys@mercer.com or by calling 1-855-286-5302