Pay Transparency Helps Your Bottom Line

If there is one complaint I hear constantly from employees, it’s that they don’t understand their organization’s pay structure.  A company’s lack of transparency creates an information vacuum that employees often fill with confusion, suspicion, and worse, resentment.

Compensation policies need structure, objectivity, fairness and transparency. If these qualities are missing, you’re headed for poor morale, low productivity, and turnover — and all of these things can hurt your bottom line in ways you may not be aware of.

When employees don’t understand why certain decisions are made, they tend to think the worst:

  • “I have no idea why I am slotted in a certain grade in the salary structure.”
  • “The company never explains how the compensation structure is created—it makes me feel like they’re hiding something.”
  • “I make the same salary as another person in the organization, but I have been here longer and I have more responsibilities.”

How do you fix it?  Have a systematic process for establishing pay scales.

Choose a method

There are two ways to create an objective and fair compensation structure:  internal job evaluation and external market analysis.

An internal job evaluation approach assigns point totals to each job based on a number of factors. Factors might include the education required for the job, whether the job has supervisory responsibilities, the time required to become proficient in the job, and so forth. Jobs with similar point scores are slotted in the same grade in the job and salary hierarchy.

External market analysis is achieved by using marketplace compensation surveys to determine what similar organizations pay their employees for performing equivalent work. Jobs with a similar “marketplace value” are slotted in the same grade in the job and salary hierarchy.

Is one better than the other?  Yes.  Marketplace analysis gives you a much better chance of establishing a transparent, objective compensation structure. Here’s why:

  • Job evaluation programs are too “subjective”.  Anyone who has worked with a point factor job evaluation system knows that significant judgment is needed in applying “points” to internal job factors.  It’s very easy for managers to manipulate this process to get the “score” they want.
  • Job evaluation programs are sometimes not sensitive enough to marketplace realities.  For example, let’s suppose two jobs are placed in the same salary grade because the job evaluation assigned each the same number of points.   What happens if qualified candidates for one of these jobs are in extremely short supply?  Organizations often raise the salary level when it’s difficult to find qualified candidates. One of the jobs may end up in a higher salary grade than the other, even though the jobs are equivalent from a job evaluation standpoint.

How to do an external market analysis

If you want an objective, defensible and transparent compensation structure, make sure a thorough marketplace analysis of your jobs is performed on a regular basis.

You can do it yourself through the purchase of compensation surveys (for example, in Washington, D.C., the Human Resources Association of the National Capital Area survey is an excellent resource).  Or, you can hire an external consultant to perform the analysis.  It doesn’t matter which approach you take, as long as you do it.

Then you will be in a position to explain to employees exactly how the compensation structure was created.  You can point to an objective, data driven process.  Employees may not agree with every single result, but they will understand that the company went through a logical and objective process.  This builds morale, productivity and—ultimately—trust.

Contact us for more information on how to increase your company’s pay scale transparency.

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