As pay transparency becomes the new standard, organizations must move past “peanut butter” raises toward a hyper-differentiated approach that rewards high impact.
By Debbie Bolla
Employees’ expectations around compensation have experienced a recent renaissance. Much of this is being driven by pay transparency. While laws around it vary by state, in practice, pay transparency shares information around workforce compensation, including salary ranges, pay bands, benefits, and pay structures. Armed with this information, employees can make more data-driven decisions around their careers.
“The information environment of today’s world allows employees to scratch that curious itch of ‘what other jobs are out there?’, with the shift towards pay transparency providing a real look into other opportunities for career growth and more importantly, salary growth,” explains Jack Jones, Senior Principal, Compensation and Total Rewards for Mercer.
In the age of transparent pay, organizations should be striving to provide compensation that is both fair and competitive. How can this be achieved? HR and comp teams need to have a deep understanding of how the compensation program is designed, and they also need to communicate it to both employees and candidates alike.
Jones provides the example listing pay ranges publicly on a job posting. Candidates can get frustrated when they don’t have an understanding of the reason of where they land within the band. Conversations are needed to discuss the meaning behind the range and the reasoning for where employees fall within it. This is also an opportunity, Jones says, to provide feedback on how candidates can eventually grow their careers and compensations at the organization.
Jones also recommends approaches that provide the “why” behind the pay, including compensation investments in high-impact roles or differentiated bands for skill-based pay. This lends itself to a hybrid model of pay in lieu of a “peanut butter approach,” in which a company distributes increases evenly, mostly to keep up with cost-of-living rates. Jones says peanut butter approaches are efficient as they require little to no administrative effort. The benefits are obvious: They can easily manage budget, they don’t require much time or data analysis, and employees have a clear understanding of standard increases. But they are often uninspiring and can deter high performance, as employees are unmotivated to go beyond the scope of their work since they understand the limited incentive involved. Balancing a variety of pay practices instead of a one-size-fits-all solution can be a game changer.
“A hyper-differentiated approach to annual pay increases will consider performance, internal equity, external market positioning, and more,” says Jones. “This approach will be more strategic, investing in your employees, rewarding those high performers, and most importantly, the important critical roles to the company all while maintaining internal equity.”
Supply and demand also have to be taken into account. Many current factors are impacting the supply and demand of the talent pool of today’s workforce: uncertainty, high inflation, increased cost of living, and job hugging. Remote work is also broadening the reach of many organizations, while in-office requirements may be having the reverse effect.
“Remote work is not beholden to a local talent pool any longer. There’s more supply of workers, which means a reduction in the cost of labor,” explains Jones. “Conversely, hands-on or on-site rules are almost entirely local talent searches. A local talent pool and the population’s general sentiment of in-office work is not ideal. It’s really creating compensation premiums for these roles.”
Although pay practices may have never been defined as simple, they certainly aren’t easy today given changing employee demand. The workforce seeks transparency and fairness when it comes to compensation. Organizations that go beyond and provide the why behind their pay practices will earn a competitive advantage.
