5 Rules for Having a Pay Conversation with Your Employees

Consider this statement from Deloitte in 2015: “After decades of corporate discourse about the war for talent, it appears that the battle is over, and talent has won.  Employees today have increased bargaining power, the job market is highly transparent, and attracting top-skilled workers is a highly competitive activity. Companies are now investing in analytics tools to figure out why people leave, and the topics of purpose, engagement, and culture weigh on the minds of business leaders everywhere. (“Becoming Irresistible: A New Model for Employee Engagement,” Deloitte Review Issue 16, January 26, 2015)

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If you are finding it more difficult these days to have a pay conversation your employees—especially your key people—that might explain it.  The tide has shifted. There is a scarcity of skilled labor and employees of unique ability know they are in the driver’s seat.  So, whether you are speaking with a new recruit that you’re trying to hire or with an existing employee who may be considering other options, you will want to be prepared.  Here are four rules I suggest you follow when having that discussion.

Rule #1—Know Who You are Talking To

You cannot expect to approach a pay discussion with every employee the same way.  What do you know about the person sitting across from you?  Is the person a Gen Xer or a millennial?  If the latter, where are they in their career?  Are they about to embark on a career-making experience with your company that will also significantly impact the trajectory of your business or are you just a stepping stone to another opportunity down the road?  What is their role in the organization and for what outcomes are they responsible?  What is their marital status and how many kids do they have?   You get the picture.  In marketing, this is called identifying the audience “persona.”  If you don’t know the make-up of the person you are speaking with (or marketing to), it will be difficult to “sell” them on your value proposition.  Generic explanations will not work.  You need to make it relevant to each person (see Rule #5).

Rule #2—Understand that the Employee Has Options

This relates to the quote from Deloitte in the opening paragraph.  This rule is best applied on an ongoing basis.  You need to be proactive about communicating the value proposition you offer and always examining whether it is giving you a competitive advantage in retaining and attracting the kind of talent you need.  You will want to make sure you not only conduct regular market pay studies but that you examine everything you can about the talent market place and what businesses are doing to reward key producers in their business.  You need to know not just what kinds of compensation programs those people are participating in now but what else is coming.  Stay ahead of the curve.  (Subscribing to this blog is one way to do that, by the way.  Just sayin’.)

Rule #3—Know What Your Employees Want

Too often employers build pay strategies based on what they assume are “best practices” without really understanding how their people view their compensation and what they expect from it.  When your employees look at your pay offering, they do not look at it the same way you do.  Business leaders like you typically think in terms of salaries, incentives, benefits and retirement plans.  Employees think in terms of lifestyle, wealth accumulation, risk protection and contribution ambitions.  They are looking at the financial component of your value proposition as a whole, not as a series of disparate programs.  What kind of house am I going to be able to live in (and in what neighborhood) as a result of my salary and annual bonus plan?  Where will I be able to vacation?  What opportunity will my rewards plan offer me to accumulate wealth, not just for retirement but for other contribution ambitions I have (charity work, education for my kids, starting my own business or non-profit, devoting more time my church or community, etc.)?  This is where researchers miss the mark in analyzing the impact of incentives on workforce motivation.   Employees are not motivated to perform better by a manipulative annual bonus plan or other behavior-based reward.  Rather they ask themselves whether the company operates under a “wealth multiplier” philosophy where all stake holders participate in the value they help create.  They want to know that if they devote their energies to helping the company grow, they will benefit—and how that will allow them meet their lifestyle and accumulation goals. 

PayStrategyWebinarCTA092717.pngRule #4—Know Your Company’s Pay Philosophy

Every conversation you have with an employee will be easier if you can articulate your organization’s philosophy about compensation.  Why do you pay your people the way you do?  Consider this research finding:

Only 20 percent of people say they understand how their employer determines pay, according to compensation research firm Payscale.  But that doesn't have to be the case, and it shouldn't be. "Ten years ago, employers held all the cards.  Now, employees can be much better armed with data," said Tim Low, PayScale's senior vice president of marketing.  With sites such as PayScale and Salary.com, employees have a greater ability to research what their work is worth and a better opportunity to ensure they're being paid fairly. (What Your Salary Says About You, Entrepreneur Magazine Online, November 17, 2015, Stacy Rapacon)

A pay philosophy is a written statement that company owners and senior strategy leaders draft to spell out a value system and construct that guides how people will be paid in the company and why.  It is written so it can be easily shared and referenced both when leadership makes decisions about specific pay strategies and when it communicates the nature of the organization’s pay system and its components to employees. It acts as a kind of compensation constitution for those charged with envisioning, creating and sustaining the rewards strategy of the company.

Employees may or may not relate to your philosophy about pay—and that is okay.  You do not want people on your team who are not aligned with your beliefs about how value is created, with whom it should be shared and what form that sharing should take.  People may disagree with your philosophy, but they cannot say it is unfair.  Claims of compensation unfairness only emerge in companies that do not have a governing belief system about pay. 

Rule #5—Market a Future

Today’s strategic players want to be compelled by their future in your organization.  They do not just want to know where the company is headed; they want to know where they fit and why their contribution is so vital.  They also want to know what it will mean to them financially if the business hits its growth targets.  They want to be treated as a growth partner, not just an employee filling a position.  So the discussion of pay needs to convey that you look at them as a partner.  When you market a future to your employees in this context, the conversation goes something like this:

“Here is our future.  Here is how we plan to get there. Here is the role we picture for you.  Here is how we encourage our people to grow and contribute. Here is our philosophy about pay and rewards.  Here are our specific pay programs.  Here is how our pay programs could work for you if we achieve our plan.”

This kind of explanation gives context to the pay programs you offer and creates line of sight.  It draws a connection between the future of the company, its business model and strategy, the employee’s role and what is expected of that role and how that person will be rewarded for fulfilling those expectations.

We live in a new business era with talent competition and expectations that are rapidly changing.  You will need an agile compensation approach to remain competitive and a high impact strategy for having a meaningful pay conversation with your people that leads to a successful outcome.  Hopefully, these five rules will help you achieve all of the above. 

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