Don't hold back on talking to employees about why they are paid what they are paid. Many employers don't, and that can diminish the motivational potential of paying your workers a competitive salary based on an understood compensation philosophy and some objective market research. Here's what others are doing.

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Poor Communication About Pay
May Sap Employee Motivation

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Almost all employers who responded to a recent poll
by WorldatWork* say they have a compensation
philosophy. And about two-thirds of those employers
say they have committed it to writing.
Trouble is, only 27 percent of them believe that the
majority of their workers actually understand it.
That might not be surprising because a significant number -- 39 percent --
reported that they share only "minimal" pay-related information with their
employees.
What kind of information?

3. What is Revealed
While very few employers reveal "actual pay levels for all employees," many
more -- 44 percent -- say they tell employees the pay range for their pay
grade, or provide some information on how they set pay levels. Only about 16
percent reveal base pay salary ranges for all pay grades or jobs.
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Authors of the "Compensation Programs and Practices" report surmise that
"the fact that so many organizations are following a similar pay policy has led
to some level of malaise in communication, where 'no change' equates to 'no
communication is necessary.'“
The message is clear: Even when you haven't overhauled your compensation
philosophy or practices, it's important to continue to let employees know that
you don't set their pay by throwing darts at a dart board. In addition, the
survey reveals that "employees' understanding of the organization's
compensation philosophy improves when there is a higher differentiation in
increases between average and top performers.“
Whether effectively communicated or not, what approach are employers
taking toward setting pay levels?

5. Reliance on Market Data
A huge majority say their goal is to set base salaries at the median level for
their "relevant labor market." (Eight percent target above the 50th
percentile
but below the 75th
.) That doesn't mean, however, that they pull it off. Only
two-thirds reported achieving that goal.
When establishing the "relative value of jobs" for purposes of setting pay
levels, most employers said "market pricing" was part of the process. In
addition, nearly one in five survey respondents said they also use a point
factor system (assigning a numeric value to all the key elements of a job and
adding them up). The same percentage reported using a simple job
classification system.
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Asked how they determine pay raises, the following methods were identified
by survey respondents:
1. Individual performance against job standards: 71 percent
2. Position in range: 59 percent
3. Individual performance against management-by-objectives or similar
personal objectives: 49 percent
4. Skill or competency acquisition: 22 percent
5. Years of service: 11 percent
6. Education/certifications: 10 percent.
Most respondents said they "typically" adjust pay on an annual basis,
although about one quarter report doing so "as needed based on market
conditions." Another 14 percent give raises only every two years.

7. COLA Raises: a Rarity
COLA-based raises are rare: Only 11 percent of employers offer those. Only 3
percent give automatic raises based on length of service.
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When the time comes to discuss an employee's pay increase, the majority of
employers do so only with "brief" written or verbal forms of communication.
Less than one-third give "detailed" written communication, and fewer than
one in five provide detailed verbal communication.
Employers report that performance is key to the level of raises. How much
bigger are the raises given to top performers than the average? The largest
percentage of employers -- 45 percent -- report top performers get raises
about 50 percent higher than the others. However, less than one-fifth say the
gap is double the amount, that is, if the average is 3 percent, high performers
get 6 percent.
More than half of employers who responded to the survey have five
performance category tiers.

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Percentage of employers using category
Pay category 2010 2012 2014
Bonuses (example, sign-on,
retention)
59 76 82
Recognition (example, spot
award)
60 66 66
Performance sharing 57 58 65
Individual incentives (excluding
sales)
67 59 42
Profit sharing 19 19 19
Variable Pay Category Trends 2010-2014

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