Updating Your Compensation Strategy: A Step-by-Step Guide

These are interesting times when it comes to compensation. The trends that have been driving changes to pay systems—and, in some cases, knocking pay levels out of alignment with historical trends and organizational budgets—show no signs of easing.

Competition for talent? Check.

Wage pressures? Check.

More pay transparency laws? Check.

Pay equity questions? Check.

All these issues are jostling for attention among normal business and competitive priorities. How well employers manage the situation will have a significant impact on their competitiveness as a business and as an employer.

These six steps can help business leaders as they move ahead on this journey into a rapidly evolving future of compensation.

Step 1: Read the Market and 'Show Up'

Employers that read the marketplace for talent accurately based on their own needs are taking steps to adjust compensation accordingly. Ally Financial, for example, has revamped its approach to compensation for its customer service workers to reflect their importance to the organization. The finance company now offers a minimum wage of $23 per hour for these jobs—a level of pay that's designed to establish the company as a market leader, according to Gwen Gollmer, executive director of total rewards.

By combining hourly wage with a stock grant of 100 shares per year, the company wants to recognize the importance and complexity of the work employees do on behalf of customers and encourage them to think like owners of the firm.

"It's more than market pressure," Gollmer says. "We're all looking to create a more engaged workforce, which adds long-term value."

As organizations are forced to confront the ongoing realities of a tight talent market and the related employee expectations of higher compensation, employers are trying to figure out what to do. But no matter what they do, these pressing issues with compensation won't be going away anytime soon.

 ‘It's more than market pressure. We're all looking to create a more engaged workforce, which adds long-term value. ’
Gwen Gollmer

Employee compensation is both a cost that employers must manage and an investment they must maximize. If employers are struggling to define the future of compensation, Gollmer urges them "to consider what they [currently] offer and how they show up for employees."

This is an important question because it's easy for the balance between the needs and wants of employees and employers to become skewed.

"Focusing on the bottom line at the expense of the employee experience can actually hurt that bottom line," says Mariann Madden, director, work and rewards, with consultancy Willis Towers Watson. At some point in the past, "organizations created pay systems that worked, but they don't always consider whether those systems still work."

Consider pay for hourly workers. Offering a competitive wage is essential to attract and retain hourly workers in the current environment. But money takes an employer only so far. This is where "showing up" comes in.

Hourly workers care about how much they make, of course. But they also care very much about how and when they earn that money.

"Work hours and scheduling are part of the employee experience," Madden says. If employees don't feel they can control that, it could undermine any return from offering higher pay levels, she says.

In other situations, an outdated or ineffective pay strategy may be blurring employees' line of sight between their efforts and their pay.

"From the perspective of the employee, why should they work harder? How is productivity rewarded? How do they move up the pay range? How do employees get considered for promotion?" asks Lexi Clarke, chief people officer for PayScale, which provides compensation data. "All of this goes back to your pay strategy."

2. Keep Systems Flexible Enough to Accommodate Change

Getting pay wrong can also cost employers access to a high-quality and more diverse talent pool. "Do the basics well and that will take care of a lot of issues," says Taylor Bradley, head of HR business partners and compensation at artificial intelligence firm Turing.com. For example, a strong and current compensation philosophy and clear pay ranges can serve as an essential firewall against pay inequities.

It's also important to remember that compensation needs to evolve to keep up as organizational goals change. This means making sure that pay structures, philosophy and practices can handle any future changes. "You need to have your ducks in a row no matter what the change is," says Paaras Parker, CHRO at Paycor, an HR software company.

For example, Patrick Mulvey, director of talent acquisition for mattress retailer Saatva, sees the need for pay programs that not only are realistic and reportable but have more-structured pay ranges. "While most large companies have had highly structured ranges, that was [not always] the case with small and mid-sized companies," he says.

Customization has also become a watchword for talent, even when it comes to compensation. If an employer is trying to hire someone with an in-demand skill set, will the organization be able to accommodate a candidate who wants to work a four-day week instead of the traditional five?

"A lot of employees are willing to make tradeoffs for a better work/life balance," says Kyle Holm, vice president, compensation advisory, at Sequoia Consulting Group.

Employers need to figure out how to fit these people and others with needed knowledge and capabilities into the compensation structure by building programs that are broader and more flexible" than traditional compensation systems, Holm says.

This flexibility is likely to be particularly important to individuals with emerging skills in areas such as artificial intelligence and other new technologies. In this environment, "cash must be competitive, but flexibility is key," Bradley says.

3. Brace Yourself for the Impact of Growing Pay Transparency

The impact of pay transparency laws is already being felt. SHRM's research shows that salary information in a job posting makes 82 percent of candidates more likely to consider applying. Conversely, a lack of this information discourages 74 percent of potential candidates. For their part, employers say that providing pay range information up front has led to more (70 percent) and better (66 percent) applicants for these roles.

Longer term, the impact of pay transparency is likely to ripple through employers' entire compensation systems, regardless of whether a specific organization is subject to pay transparency laws. For example, "external and internal candidates can easily come with detailed information on the pricing of a specific role" gleaned from job postings inside and outside of the organization, Mulvey says. As a result, instead of "giving a standard X-percentage increase with a promotion, employers will need to tie promotions to the appropriate level of the new role," while external candidates will also come armed with hard data when negotiating pay, he says.

Smart employers are looking for ways to incorporate these changes into their overall value proposition for talent. For example, firms paying closer to the midpoint of market rates will have to become more effective in communicating nonsalary benefits, including remote work, perks and incentives, and paid time off, to remain competitive.

"While larger companies and specific industries, like financial services, have a competitive advantage in recruiting because they often pay well above the midpoint," the push to bring employees back to the office on a full-time or hybrid basis may erode that advantage, Mulvey says. The greater flexibility of smaller, more nimble organizations to remain remote could provide those organizations with more of an advantage among some groups of workers.

4. Be Ready to Tell Your Compensation Story

As more compensation information and data become readily available to anyone who looks for it, employers will need to get out in front of this information flow. Does the employer's salary data stand up to scrutiny? If employers find that it doesn't or aren't sure, they should take steps to root out any pay discrepancies and disparities based on gender, race and other irrelevant factors, while also ensuring long-tenured employees are being paid market rates.

Shipley urges employers to spend time planning what they want to do and what they want to be in terms of pay, then get ready for change. "It's important to have the right structure and feel good about your data," she says. This can include ensuring the integrity of data, conducting a pay equity analysis, making sure jobs are market-priced correctly, and confirming allowable ways to differentiate pay between employees.

Without this type of analysis, "employers may not have the structure to defend pay decisions, or they might have some inconsistencies to explain," says Tauseef Rahman, career practice growth leader with consulting firm Mercer. Therefore, Rahman suggests that employers allow three or four months to conduct training, validate compensation data and prepare to defend pay decisions when necessary.

These efforts also give employers time to develop a narrative for pay discussions and disclosures. "I think we will see companies wanting to control the salary narrative," Mulvey says. In his view, public pay ranges can nurture more straightforward wage discussions that can help simplify salary negotiation for many roles. "Because of our confidence in our salary structure, we have been comfortable in posting our ranges for positions," he says.

Ally Financial has stopped asking about candidates' pay histories regardless of location and is now monitoring the impact of this decision.

"Every regulatory change or emerging trend presents an opportunity," Gollmer says. "We need to invest the time to fully understand what [a trend] means for us," and how it fits into the firm's compensation strategy.

For employers that have not taken steps to deal with pay transparency, the clock is ticking. As pay transparency requirements become more common, employers that forego or delay even voluntary pay disclosures could inadvertently give the wrong impression. In some cases, they may be called upon to give a rationale for making only required disclosures. "Why is a company only doing what's required, and why doesn't it disclose all pay information?" Rahman says. "These are fair questions."

5. Prepare Employees to Hear that Story

Communication about pay from employer to employee should also be a priority. "Fair pay requires measuring of pay gaps, but it's also about perception and communication," Clarke says. "Although pay fairness has been communicated to executives and understood in HR, organizations need to get better at communicating pay practices with managers and employees."

 ‘Companies struggle to communicate pay.’
Mariann Madden

Indeed, the dual challenges of pay transparency and competition for talent are forcing individual managers to have conversations with employees about pay regardless of whether either party is ready for that conversation.

"Companies struggle to communicate pay," Madden says.

Yet, these conversations are critical. Half of employees are more likely to leave their job if they believe they're paid below market, even if that's not actually the case, according to research conducted by PayScale. After all, it's the employee's perception of their pay that matters here. Preparing managers for pay conversations with employees should be a priority, although only 49 percent of companies do so.

To change that, employers can focus on making sure managers have a solid grasp of the basics of the pay system. For example, "they need to understand where the employee is in the pay range for their job," says Brian Goldberg, senior vice president of global total rewards for human capital management software company Ceridian.

If certain employees think they're being underpaid, this is the time to find out why they think that. With that insight, employers can help employees understand the data underlying the pay structure and the reasoning behind pay decisions.

"When the information is readily available internally and externally, [an employee will already know] what the increase will be if they move from one role to another," Mulvey says. For example, an employee contemplating a promotion who's at the top of the range in their current job will realize more readily (or with some help from their manager or HR) that they may receive only a modest increase with that promotion if their current salary is already at the midpoint of the pay range for their new role.

Eventually, this type of education about pay will have to permeate an organization from top to bottom to make a difference in employees' understanding of their pay and the employer's decisions about compensation. This resulting insight into the workings of the compensation system and pay-related decision-making can be a thunderbolt for managers and executives.

"People often say that no one ever talks about [pay in this way]," Parker says. However, if and when these conversations do take place, "it makes [everyone] feel empowered, because they have a foundation of knowledge to pay attention and ask better questions."

Employees may also need a briefing on the nomenclature of compensation. This can include an explanation about what "market" means to the employer when setting compensation levels. Conversations about the significance of a compensation midpoint can help manage employee expectations regarding pay.

"They may have to be a couple of years into a specific role with strong performance and demonstrated potential before [their pay approaches] the midpoint," Parker says. These discussions can also cover other relevant issues, such as geographic differentials, requirements to do a job well, and how skills acquisition and other factors can impact pay.

6. Learn from Experience

The past few years have been a difficult learning experience for many organizations. How each one deals with the long-term impact on compensation practices will depend largely on their specific situation.

For example, as interest rate increases raised the cost of capital, many growth companies have had to rethink their aggressive compensation approaches. "In a high-interest-rate environment, you have to be more mindful of how you use capital in the business," Bradley says. "Instead of copying and pasting what other firms do, companies need to develop a realistic and sustainable compensation plan that will help attract talent the company can afford."

 ‘Instead of copying and pasting what other firms do, companies need to develop a realistic and sustainable compensation plan that will help attract talent the company can afford.’
Taylor Bradley

Sustainability and affordability are key issues with employers who rapidly increased pay in a desperate effort to attract and retain talent. An analysis by consulting firm Gartner of job changers found that the typical job-switching premium was about 17 percent in 2022, while those moving to hard-to-fill jobs saw 25 percent increases in pay for changing jobs.

"Once the economy took a downturn, these salaries turned out to be unsustainable, and some organizations are rethinking their compensation strategies," says Tony Guadagni, a senior principal with the firm.

This type of learning will continue to be crucial as employers position themselves for an uncertain future. "Companies have always been able to adapt," Goldberg says. "The next few years will be interesting to watch."

Joanne Sammer is a freelance writer based in New Jersey.

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