Compensation is one of the clearest ways an organization can express how they value someone, to express how they care for their culture, and to continuously monitor and apply equality throughout an organization. The problem is, most organizations are overwhelmed by the complexity of compensation, which results in employees who are unclear on why and how their compensation came to be. In order to clear up that confusion and have more informed conversations about compensation, let’s break it down into smaller problems, to better understand one at a time.
The word ‘compensation’ is confusing
Compensation is broken. There’s no consistent definition for it, either in the dictionary, nor in the way organizations use it.
something, typically money, awarded to someone as a recompense for loss, injury, or suffering.
the action or process of awarding someone money as a recompense for loss, injury, or suffering. "the compensation of victims"
the money received by an employee from an employer as a salary or wages.
Compensation is a multi-dimensional problem without a universal language. When one person says compensation, they may be referring to base salary, while another may be referring to base salary and bonus, and another may be referring to base salary, bonus, and equity.
The first step toward breaking down barriers is to clearly lay out each variable in your compensation strategy and understand how those variables compare to the marketplace around you. For instance, do you lead or lag the market in compensation? If you lag the market, do you make up for it with things like bonuses, equity, and benefits? Then, develop simple ways to discuss your strategy with each employee. Be sure everyone involved is on the same page, thinking about the same variables, with a shared understanding of what they represent, before diving into further discussions and decisions.
Building a standardization of fairness
Repeat after me: I will pay underrepresented groups fairly.
Without a solid compensation strategy and standardization of fairness, underrepresented groups suffer the most. For example, women earn 83 percent as much as men, and Black employees earn 75 percent as much as their White colleagues. To help close these pay gaps, many states are making it illegal to ask for a candidate’s salary history in order to determine an offer. However, lack of a compensation strategy can still perpetuate these gaps. Women are less likely to negotiate than men, and all underrepresented groups may not fully understand their market value, due to a lifetime of being undervalued and under-compensated.
Begin with the agreement to be fair, and build a consistent way to monitor, measure, and execute against your standardized fairness across all groups. Look at your job grades and salary bands, and how each employee fits into them. Then break this down by gender and ethnicity. While you can certainly do this in spreadsheets, a compensation intelligence tool can help. If you see gaps, fix them—even if you need to do this over several pay periods. Communicate these changes with employees, so they know you’re aware and taking action. This transparency goes a long way in building trust and breaking down barriers within your team.
Working on your compensation workflow
Compensation and total rewards are not a static, one-time transaction to be forgotten. The idea of nurturing your employee via compensation is an ongoing process which should be driven by standardized and iterative fairness. Consider how fast the market changes. An employee you hired mid-year may very well command more than one hired earlier in the year, simply due to a change in supply and demand. Both employees may have the same market value, but be compensated differently based on when they were hired.
When you think about compensation as an ongoing process, realize there are many opportunities for an organization to realign, adjust, or reward the individual over time. For instance, during headcount planning, at the time of hire, during performance management, and during performance optimization. The point of mentioning these isn't to argue about the perfect time to talk about compensation, but instead, to make the point there are several times where talking about compensation with your team is a best practice. The key here is to be thoughtful about your end-to-end compensation philosophy from the onset, including how it fits into different inflection points throughout the employee lifecycle. Your strategy should cover how you will identify problems, collaborate around solutions, utilize data to inform the decisions, and iteratively execute at each inflection point.
There is no silver bullet for compensation, there are ways to improve your strategy so you can better express your appreciation for each employee. First, be bullish about execution only after you’ve aligned around what standardized fairness means for your organization. Second, be thoughtful about the perception and impact of compensation throughout the entire employee lifecycle. Third, don't be afraid of technology once you've designed a world-class strategy and are ready to implement it. The right compensation intelligence solution is equivalent to your organization's ability to govern, measure, and iterate effectively.