Research finds approaching compensation in three modern ways is paying off for organizations.
By Tim Low
It’s the age-old question: Should you take a risk with something new that may be better, or stick with what you’ve always known? While it can feel uncertain venturing into new terrain, PayScale’s 2016 Compensation Best Practices Report reveals the risk of adopting new practices brings the reward of more engaged employees who drive better business outcomes. The study found that top performing companies—those defined as market leaders who exceeded projected revenue goals—are significantly more likely to embrace modern compensation than their average performing counterparts. Highly successful organizations tend to adopt a variety of pay practices including:
• variable pay to recognize individual and team contribution;
• higher levels of pay transparency; and
• increased compensation packages for competitive positions.
The report shows three trends among top performing companies:
1. Valuing employees and aiming to get pay right. Top performing companies defy two prevailing ideas in today’s corporate culture. One is the notion that compensation planning is a necessary evil for HR and the other is the idea that employees are easily replaced. By contrast, the report found that top performing companies truly value their people more and take their pay more seriously. Half of top performing companies have a formal compensation strategy in place compared to just 38 percent of average performing companies. Additionally, 86 percent of these top performers agreed with the statement “our people are our greatest asset” versus 78 percent of other companies.The message is simple: When you value your employees more, you invest more time and energy in creating a compensation strategy that ensures they feel recognized and valued.
Typical compensation programs in place at most companies are created by default, not design. PayScale’s research shows top performers flip this formula on its head. These more successful companies realize in order to recruit and retain top talent, they must have a competitive compensation strategy as their foundation. But, many companies don’t know how to build a compensation program that rewards those who make the biggest contribution to the bottom line.
Similarly, the research reveals that top performing companies also pay their employees more. In 2015, 90 percent of top companies gave pay raises compared to 84 percent of average ones. Similarly, 80 percent of top performing companies gave bonuses in 2015, which is 6 percent higher than those offering bonuses at average companies. Most bonuses are awarded to recognize employee contribution to the bottom line, a practice that is known as pay-for-performance. PayScale anticipates this trend of offering performance-based pay will continue in 2016, as half of all top performing companies are increasing their bonus budgets this year.
2. Discussing pay with employees. Because top performing companies respect their people more, they are more likely to communicate openly and honestly with them about pay. In fact, nearly half of these more successful companies embrace transparent pay practices, as opposed to just 40 percent of other companies. While it can be a departure from the traditional corporate veil over communication around pay, a more transparent compensation policy pays off. Another PayScale study of 71,000 employees finds that 82 percent of employees would be more likely to accept below-market pay as long as their employer was straightforward with them about the rationale. This underscores how important transparency is to ensuring employees are happy with their compensation. Open discussions can be transformative in the way employees experience and perceive their pay. The importance of pay transparency will become even more apparent as Millennials, a notoriously open and transparent generation, establish themselves as the dominant demographic in the workforce.
The current communication process around compensation at most organizations is not streamlined, leaving many employees to reach their own conclusions about their pay, which is often inaccurate. In fact, PayScale research finds that two-thirds of employees who were paid at market rate actually believed they were underpaid. So, it’s not even enough to overpay employees if organizations want to keep them happy. Without an explanation about how pay rates are determined, misconceptions could send the best employees right out the door.
The shift that’s occurred in recent years around compensation websites offers good proxy for the need for salary transparency today. Initially, employers saw the emergence of these sites a bad thing, but today, more employers have embraced the data provided by these sites, using them to create benchmarks for various positions. This data can also help determine compensation adjustments for employees. The same sea change is needed in attitudes around compensation transparency.Employers must understand that employee chatter around salaries will never go away. Instead, organizations should get out in front and manage those pay conversations and embrace them as an opportunity for building a better relationship with employees.
3. Paying employees based on their performance. Top performing companies are also more likely to eschew the traditional cost-of-living raise in favor of new pay-for- performance models. While sales departments have long functioned on a variable pay model, top performing companies are paying more of their employees based on performance. For example, 39 percent of top performing companies already have variable pay structures for their human resources department, versus 31 percent of average performing companies. These more successful companies are also likely to have pay-for-performance models in place across a wide range of departments including finance, marketing, and IT. Similarly, top performing companies are more likely (61 percent versus 54 percent) to offer larger salaries for highly competitive jobs.
From this data, the trend becomes more refined: It’s not just that top performing companies value their people more; it’s also that they value the right people more. The right people are those that bring the most desirable skills, hit their performance targets, and ultimately drive the best business outcomes for the company.
To embrace the trend set by top performing companies, employers should accept that the world of work has changed. The rise of Millennials necessitates more transparent conversations that would have never worked in a workforce dominated by baby boomers. Technology has revolutionized the economy, creating a highly competitive environment for specialized technical and STEM skills. Organizations are also under tremendous pressure to show a strong return on investment, leaving employees more accountable for showing measurable business results.
Most business practices have been re-evaluated and updated over the past five to 10 years with the advent of new technologies. Meanwhile, compensation structures at most companies remain the exception. Until this changes, many organizations may struggle to foster a trusting culture with their employee and achieve a truly engaged workforce. For the fifth year in a row, PayScale’s research shows that retention was the primary concern for most employers. The bottom line is that great people are intrinsically linked to great pay and employers that understand this will prosper. The path blazed by the most successful companies sends a clear message: People matter and pay matters to people.
Pay practices of top performing companies mark a sharp departure from traditional corporate compensation practices. And it’s clear that with the risk of change comes the reward. Companies should begin to adapt their approach to compensation, making positive incremental changes until they are exhibiting modern pay practices. Big data and analytics make it much easier for employers to make fair and accurate decisions about pay.
The road to success is paved with a thousand small steps.A good start is to equip managers with real-time market data to foster more open conversations with their teams around pay. It’s challenging for organizations to change overnight, but adopting new practices will help attract and retain the most valued talent in today’s evolving business environment.
Payscale’s 2016 Compensation Best Practices Report finds that pay matters to people. Consider these statistics:
90% of top companies gave pay raises compared to 84 percent of average ones
61% of top performing companies are more likely to offer larger salaries for highly competitive jobs
Nearly half of successful companies embrace transparent pay practices compared to just 40% of other companies
Tim Low (@tlow) is senior vice president of marketing for PayScale.