Fairness in compensation is no longer a topic found just in political conversations. And it isn’t restricted to discussions about whether women are paid as much as men for the same job—or if the wage discrepancy between CEOs and rank and file employees is too wide. It has now become a core strategic issue businesses have to address. The good news is that it's not a hard matter to resolve if companies apply the right principles in their approach to rewards. And now, more than ever before, they have an urgent need and motivation to make “fairness" in pay a priority. Namely, their survival depends upon it. Let’s explore why.
As a starting point, consider these research-based observations of Scott Olson, the U.S. People and Organization practice co-leader and a principal with PwC US.
…far from being primarily a public relations move, fair-pay principles can give companies the competitive edge they need to attract and retain talent. Businesses that lead on fair pay are better positioned to attract and retain the best workers.
Fairness clearly matters to prospective employees. Sixty percent of employees say they would not apply for a job where they knew a pay gap existed between men and women, according to the American Association of University Women. Among women — who make up the majority of those with bachelor’s degrees — this percentage rises to 81 percent. This tells us that people are thinking about fairness and pay already, and they’re making decisions about where to apply for a job at least partially on the basis of whether they believe the company treats people fairly. The opposite is true, too. It’s harder to retain people and keep them engaged and productive if they feel that they’re underpaid or not being treated fairly.
And why is it relevant that prospective employees consider fairness in pay a priority? Olson explains:
Talent — having people with the right skills, temperaments, and motivations on the payroll — is one of the biggest issues on the minds of business leaders today. And for good reason: The labor markets are extremely tight in the U.S., with an unemployment rate hovering at 4.1 percent and nearly 6.1 million open positions. In PwC’s 20th CEO Survey, 77 percent of CEOs said they saw the scarcity of key skills as the biggest threat to their business. And the challenge of finding the right person for the job is only going to get more difficult as technology evolves and businesses need increasingly specialized skills, such as advanced coding knowledge or the ability to design and train robots for automation.
So now that you understand why your survival as a business depends on developing a “fair” approach to compensating your people, how do you do that? In broad terms, there are essentially four parts to the answer.
The “Fair Pay” Formula
Part 1: Establish a Performance Framework
This construct is made up of three areas of performance focus: The Business Framework, The Compensation Framework and the Talent Framework. These are separate but interdependent parts that work together to ensure you can attract and retain the right talent and build a unified financial vision for growing the business. The Business Framework addresses the company vision, its business model and strategy, success standards and role identities. The Compensation Framework identifies the philosophy that will guide decisions about pay (see Step #2) and the structural and mindset issues that your pay strategy will need to address. The Talent Framework draws upon the other two to define where talent gaps exist, what the recruiting strategy will be going forward (to address the gaps) and the value proposition (as defined by the Compensation Framework) that will be used to attract and retain the best people.
Learn more about what is involved in constructing a Performance Framework: https://blog.vladvisors.com/blog/priority-1-for-2017-define-your-performance-framework
Part 2: Adopt a “Wealth Multiplier” Pay Philosophy
There is a fundamental mindset that differentiates businesses that succeed at the highest levels from all others. They adopt what might be considered an abundance mentality when it comes to their focus on business development and growth. We call these organizations “wealth multipliers.” Their performance standards are driven by a desire to benefit not just shareholders but all who have in an interest in seeing the company succeed: customers, employees, communities and even nations.
Wealth multipliers believe that the best way to protect and grow shareholders’ investment in their business is to ensure that others participants in the value they help create. In particular they consider and treat their employees as growth partners instead of mere bystanders to the company’s success. They enlarge the opportunity for their workforce to enjoy the fruits of organizational growth.
This is accomplished by taking a comprehensive approach to pay strategy development under the umbrella and direction of a clear compensation philosophy statement—an itemization of beliefs about how pay will be constructed for the organization and why. A pay philosophy identifies how the company defines value creation as well as how and with whom it believes it should be shared. It defines what balance the business will strike between guaranteed and variable compensation and how that will be applied to different tiers or groups of employees. The philosophy likewise articulates the balance the organization wants to maintain between rewarding short versus long-term performance. It says under what circumstances equity will be shared. High performance companies define all these elements within a wealth multiplier construct that makes sure shareholder and other stake holder interests are always aligned.
Fairness in pay will be achieved only when companies come to terms with the relationship between value creation and value sharing. Once they do, pay fairness becomes a natural byproduct of a sound pay philosophy that is reflected in coherent value sharing plans.
Part 3: Manage Pay within a Total Compensation Structure
Organizations invite claims of unfair pay practices when they treat compensation as an expense instead of an investment. When company leadership has a cost mindset about pay, its instincts are to always be trying to limit it. Conversely, if it views the various rewards elements it offers as compensation components in an investment “portfolio,” the focus becomes making sure the right pay “asset classes” are being added and that they are in the right proportion. When they are, the rewards investment “portfolio” is considered balanced. Approaching compensation design as you would the building of an investment portfolio also means you “begin with the end in mind,” as Stephen R. Covey once advised. You determine the goal your pay strategy is intended to help you achieve and then pick the rewards elements which, in combination, will help you meet that target—just as you would with your investment portfolio.
For this reason, businesses need a Total Compensation Structure to help them manage their Total Compensation Investment. This framework can be built in many ways but it should provide leadership the ability to see all pay elements that make up the company’s comprehensive compensation strategy at the same time by group or tier of employee. Again, it is like looking at all of the asset classes within your investment “portfolio” through one consolidated view. By seeing compensation through this “lens,” it no longer becomes a series of disparate parts. Instead, each pay component is seen as an essential piece of a “whole” strategy that is organized to achieve a strategic purpose.
The best designed Total Compensation Structures offer management a dashboard view where they can quickly see whether or not their portfolio is out of balance. For example, perhaps there is a generous annual value sharing plan but little or nothing that rewards sustained performance. Or maybe there is a strong 401(k) plan but no supplemental retirement plan for highly compensated employees. A dashboard will quickly reveal these kinds of discrepancies and allow those responsible for rewards development and management to more effectively move towards a balanced “portfolio.”
Part 4: Commit to Transparency
If your organization is diligent in apply the first three parts of this fair pay formula, transparency will no longer be a threatening concept. Business leaders avoid openness when they feel like they don’t have good answers for employee concerns. The problem is, the more they double down on what is perceived to be secrecy, the more they invite skepticism—even when it’s not deserved.
Once you have done the hard work of defining your performance framework, articulating a pay philosophy rooted in “wealth multiplier” principles and organized a Total Compensation Structure, you will feel more confident about what is undergirding your approach to pay. This allows you to become more proactive about communicating and promoting your value proposition as a key part of your employer brand—keeping you out in front of internal and external discussions about rewards instead always on the defensive.
In the end, there will always be individuals who think they should be paid more—or at least wish that were the case. However, once you put these principles into practice, and clearly communicate the performance standards that undergird the pay construct of your business, your employees may dislike and even disagree with it. Perhaps, even enough to leave. But they won’t be able to claim it’s unfair.