Compensation, Compensation Administration

Be Sure Your Pay Program Compensates Fairly—and That Employees Know It

by Lisa Higgins, Contributing Editor

Would your employees say they are paid fairly? A perception of fair pay is imperative in employee retention. On the flip side, a perception of unfair pay can be a powerful motivator for employees to leave the company.

Today’s nearly unfettered access to pay data could lead employees to inaccurate conclusions about how their own pay stacks up against that of their counterparts. In truth, they don’t necessarily have a complete picture of the reasons why people are paid what they’re paid.

fair pay

Willis Towers Watson found that a slight majority of the 31,000 employees who participated in their recent worldwide survey, including 3,105 in the U.S., believe they are paid fairly. The 2016 Global Workforce Study found that 53% of employees believe their pay is fair when compared to people in similar roles at other companies. However, nearly one quarter of respondents (24%) said they are not paid fairly.

This belief can sap morale, leading to reduced productivity and higher turnover. Both of these measures matter because they are the drivers of company performance, according to the study’s authors.

“Pay equity is rapidly becoming a high priority for employers, especially with base pay continuing to be the most frequently cited reason employees choose to join or leave an organization,” said Laura Sejen, managing director of Talent and Rewards at Willis Towers Watson.

“For employers, there is much at stake, and also room for improvement. Employees’ perception that they are paid fairly is closely linked to their engagement, which, in turn, drives overall productivity and, ultimately, financial performance,” she said.

Companies Fail to Take Basic Pay Equity Steps

With employee opinions split roughly down the middle with regard to pay equity, what is the truth? Willis Towers Watson says that many employers have failed to take some basic, but important steps, to ensure employee pay equity.

Its 2016 Global Talent Management and Rewards Survey shows that, of the more than 2,000 companies worldwide (441 in the U.S.) that participated, only 52% have created a formal process to ensure fairness in compensation distribution. This lack of information can make proving or disproving pay equity difficult, if not impossible, for employees and employers alike.

The Willis Towers Watson study shows that roughly one third of employees have little understanding of how their salary is determined. Further, only 39% say they understand how their total compensation compares with that of the typical employee in their own organization, and 34% with the typical employee in other companies.

Context and CEO/Median Employee Pay Ratio

This lack of understanding can become problematic, especially when organizations begin to report on the CEO pay ratio against the pay of the median employee. They will not have the context needed to properly interpret those numbers, according to Willis Towers Watson.

“The importance of effective employee communication around pay has never been greater,” says Kate Van Hulzen, global practice leader, Communication and Change Management at Willis Towers Watson. “Some states have adopted pay equity laws, and the CEO pay ratio disclosure requirements are likely to add fuel to growing concerns over pay equity and employee understanding.”

Employers can address the situation through a combination of research and planning, Van Hulzen explains. “Employers should take this opportunity to conduct analyses of both external market competitiveness and internal fairness, and develop an action plan to address pay equity issues,” she says.

Easy online availability of pay information can serve to confuse employees who want to know how their pay compares to that of their peers. “Employers will have to address the growing need for more pay transparency, given the increasing expectation of openness regarding pay and pay equity,” said Sejen.

“It’s becoming much easier for employees to gather salary information from online sources and learn what people with jobs similar to theirs are earning. But before they can be more transparent about pay, employers will have to make sure their programs are designed, administered and delivered effectively.”

It appears that employers recognize the imperative to effectively design and execute their pay programs. The study found that more than four in 10 employers have already taken steps, or are planning or considering initiatives, to change the criteria for base pay increases.

The Role of Managers

Managers are at least partly responsible for problems with the execution of pay programs, according to the surveyed companies. Just 39% said their managers are executing their base pay programs well, and 26% said their managers are not effective at fairly reflecting employee performance in their pay decisions. Overcoming these issues involves better training, according to Van Hulzen.

“The strategy must include training managers on communication and ensuring they have the tools and resources to effectively communicate with employees about the basis for their pay opportunity and pay decisions,” she said.

In their summary report of the findings of both studies, Willis Towers Watson urges employers to improve the effectiveness of their managers’ communications regarding pay with six simple steps.

  1. Make sure managers have the time needed to do their jobs well.
  2. Make sure they listen to and treat their employees with respect.
  3. Be sure they have the right tools and training. These should cover everything from performance management to career development.
  4. Design career tracks that recognize that not everyone is cut out to be a manager. Ensure that only well-suited employees are promoted to managerial positions, rather than making management the next step for everyone who performs well and deserves additional compensation. At the same time, employees who are not well-suited to manage can remain valuable to the organization and should be fairly compensated.
  5. Identify the best candidates for a management role through formal assessments.
  6. Make sure leaders and managers are aligned so that employees see them working effectively together.