Conducting Compensation Reviews That Inspire High Performance
Compensation reviews strengthen the workforce experience (Wx) and help people feel valued. People understand the rationale behind pay decisions and belief in the fairness of pay processes increases, creating a cycle of high performance and high retention.
Compensation reviews conducted with the right intent elevate the overall company performance.
In fact, research indicates that more than the actual pay, the ability of a company to communicate pay effectively influences the motivation and ‘intent to stay’ that people have.
The purpose of compensation reviews.
Compensation is not just a number, it is an emotion. People relate their compensation to how much their company values them and their contributions. This is a classic paradox.
Companies have pay ranges for each job, so technically they are not paying for individual differences, but for the job as a whole. For example, Ben and Holly could both be accountants, but their compensation would depend on the pay range for the job of the account and not their individual differences.
The downside of this is that as individuals they may feel disrespected and devalued by the compensation. That is why compensation reviews need to address the individual need to be recognized and respected for contributions.
In addition, clear communication about compensation provides guidance to people about the overall compensation philosophy at the company.
Not only that, employees are also able to understand what they are being paid and how they can maximize what they earn. By telling their people about how exceptional contributions translate into higher rewards (and recognition), managers can improve the ‘intent to stay’ and job satisfaction.
However, your compensation review process must clearly be seen as fair and just.
How to conduct a fair and unbiased review.
Conducting a fair, just, and unbiased review is simpler than it seems. To ensure that your compensation review discussion is fair and unbiased:
- Ensure that managers understand how to conduct compensation reviews: Train managers on having empathetic but clear conversations around compensation. Provide them with the right tools and skills to not shy away from tough conversations as well. Help them understand that their role is to guide their people on performance improvement and not merely to ferry messages between leadership and people.
- Listen to your people: Since compensation is a sensitive topic for most people, keep listening to how people are feeling before and after the review. In particular, focus on eliminating bias against underrepresented groups and communities. In case you spot anything that needs to be addressed, do it proactively while having regular two-way discussions with your people. The sooner you address common issues and repeat issues, the sooner you gain credibility.
- Highlight the non-negotiability of decisions: It may seem harsh at times, but compensation decisions and review outcomes are typically not eligible for appeal. Let managers own these decisions for their teams with a ‘the buck stops here’ mindset. Too often, managers tend to hold HR or other teams accountable for decisions. Help managers understand that this makes them appear less competent and not strong advocates for their people. By displaying more ownership, they can make communication easier with their team. Also, this does not mean grievances need to be ignored. However, exceptions without sound rationale should be avoided.
- Ensure alignment with contributions: One of the hallmarks of a good compensation review is its alignment with an employee’s work output. People need to be paid in line with their contributions to the company. Stronger contributors should receive a higher share of rewards, recognition, and opportunities. At the same time, people who are not pulling their weight need to be coached and supported on an improvement journey.
Overall, these steps demystify compensation reviews for people and build trust. When people feel respected and heard their motivation and engagement increase.
What are the factors that determine compensation?
There are multiple factors that contribute to compensation and pay increases. Highlight the logic behind pay decisions to people.
Pay increases are offered for an increase in competency, which enables an employee to deliver better quality output in the future.
Bonuses and variable pay are offered for the value created in the past, during the last period.
The total cash compensation (TCC) can vary based on these aspects. For example, the TCC for a job would include all cash components, short-term and long-term bonuses, and any other earning opportunities that the employee is eligible for.
Some companies have started taking an approach towards ‘total rewards’, which include cash compensation as well as intangible benefits and cultural aspects.
However, from a compensation standpoint, the employee’s current ‘position-in-range’ becomes important. People who are already above the midpoint of the pay range for their level may see smaller pay increases than the ones at entry level.
Not only that, market movements and internal/external equity may also play a part in determining compensation.
Your managers should be able to explain which of these factors play a part in deciding employee compensation.
Should performance conversations and compensation reviews happen together?
There are viewpoints on both sides – some people feel having the two together saves time and effort. Also, it helps people understand the linkage between the two more clearly.
However, the critics of this process claim that combining performance and compensation discussions leads to focus being lost and compensation conversations being diluted.
The actual answer probably lies somewhere in the middle and depends on other factors.
If your company has regular performance discussions and informs people of progress, you can easily separate performance and compensation. However, if performance is a black box for people through the year, you will need to have a discussion that clearly mentions performance and its implications, including performance.
In addition, it is administratively easier and less stressful for both parties to discuss the two together.
However, irrespective of the order in which you conduct the two, it is possible to have pleasant and action-oriented discussions.
What should managers do to make compensation reviews productive?
For a manager, the ideal way to conduct a productive compensation review is:
- Prepare in advance: Go into the discussion with an understanding of the person’s performance, history of compensation increases, and current position-in-range. Understand if there are past issues and unresolved questions that might need to be addressed.
- Be open and listen: Engage in two-way dialog instead of merely fulfilling your agenda of completing your share of the discussion. Listen to the stated and unstated aspects from the employee.
- Be future-focused: Highlight past performance and the associated compensation outcomes. But, focus on the future and how to strengthen performance to get a higher share of rewards and recognition. Provide guidance to the employee about correcting course and emerging better and stronger. Utilize a coaching approach like that provided by TMA to guide people toward embracing their strengths.
- Make it a positive experience: For an employee, a compensation review discussion can be an intense, overwhelming experience – often as painful as a root canal. Make sure that managers are equipped to turn it into a positive, meaningful discussion for their people.
- Ensure zero surprises: The gap between expectations and reality can flare up during a compensation review. To avoid that, managers need to explain the facts that add up to the compensation decisions and create clear links between compensation and performance/behaviors.
Compensation reviews need to be thorough, objective, and employee-focused.
With proper planning and factoring in employee priorities, your company and you can be open and honest about compensation reviews. They no longer need to be a taboo topic.
A crucial component of effective compensation reviews are managers who are well-equipped for these conversations. Periodically training managers to talk about compensation can be instrumental in improving communication.
Managers will be able to stay aligned with local laws and regulations and contribute to a positive Wx. In addition, they will be able to refer to industry changes and market movements, as relevant.
At CompTeam, we recommend bringing the compensation philosophy to life through effective compensation reviews. To enable your managers to have better review conversations, reach out to us at [email protected].