Depending on the news delivered, merit pay conversations can sometimes be no more fun than a root canal, but preparation and taking the right approach can make it a painless experience. After all, you’ve spent months researching and analyzing benchmark salary survey data in order to build a competitive plan for 2019, so don’t stop short of the finish line. A crucial next step is to be able to effectively communicate those individual pay decisions to employees and answer any questions that may arise.
But before we unveil some practical tips for having a productive pay conversation, let’s recap the key findings from Aon’s 2018 U.S. Salary Increase Survey to get a better understanding of the budget landscape most companies are entering into in 2019.
What to Expect in 2019
Aon’s 2018 U.S. Salary Increase Survey reflects a strong economic outlook for most industries, with significant demand for goods and services and robust job creation. Base pay budgets are projected to increase to 3.1% in 2019, which would be the highest salary increase since the 2008-2009 recession. Variable pay (such as incentive or sign-on bonuses and special recognition awards), on the other hand, is expected to drop to 12.1% – the largest decline since 2010. That would bring total cash compensation down from 15.5% to 15.2%.
Since organizations appear unwilling to increase their overall labor expenses, we are observing a small shift in pay mix from variable spending to fixed spending as a response to the hot job market.
Meanwhile, average 2018 merit increases for all companies in our survey included top performers earned 4.3%, average performers made 2.7% and low actual merit increases earned included 4.3% for top performers, 2.7% for average performers, and 0.8% for low performers.
In light of these pay shifts in the market, the need to be transparent and communicate your compensation decisions to the employee population is paramount to earning their trust.
How to Communicate Merit Pay Decisions
We recommend using the following steps as a roadmap to initiate productive conversations about pay decisions with employees.
1. Get buy-in from key stakeholders: To carry out a successful communications plan, it’s important to get buy-in early from stakeholders and to make sure each party knows the role they will play. These stakeholders typically include:
- Senior leaders – reinforce key message points as part of their communications with their management team or in larger employee sessions.
- HR generalists – facilitate timely execution of the communication plan.
- Compensation – develop communication materials and manage the overall timeline.
- Front-line managers – engage with individual employees on the team.
2. Provide big-picture perspective: Enhance employee understanding of compensation decisions by laying the foundation and providing context to frame up pay discussions. This may include touching on:
- The organization’s reward philosophy – Express the beliefs about what is most valued and what gets rewarded. Are you truly a pay-for-performance organization? Do you value external pay competitiveness, internal equity or both?
- Individual performance – Provide a quick recap of performance review discussions with the employee to help set the context for the rest of the pay discussion.
3. Arm the messenger: Front-line managers are arguably in the best position to deliver compensation messages but may not be adequately prepared to talk with their employees about pay.
You can help arm them with the tools they need by:
- Preparing – Be clear about the logistics of what each manager needs to complete and by when.
- Providing talking points and FAQs – Managers can be most effective when they carry out the conversation in their own words; however, you should provide a detailed conversation outline to ensure all the key message points are covered.
- Practicing – Role-play and allow managers to practice different ways to deliver and respond around their key talking points so they will feel comfortable doing it with their teams.
4. Consider your organization’s stance on transparency: The level of depth a manager would get into is largely dependent on the culture of the organization and the extent to which there is transparency around pay. Employees today have access to data like never before, and organizations are increasingly evolving toward a more transparent culture. Which of these levels rings true at your organization?
- Little to no pay transparency – The extent of the communication is limited to things like the amount of award size and when it will be effective. There tends not to be too much discussion.
- Moderate/evolving pay transparency – Managers are able to share a bit more about the specific pay action, but also go much deeper with information about the structure and the mechanics for making pay decisions.
- Full pay transparency – A discussion about compensation in highly transparent organizations could include details such as how the market data was analyzed and what survey sources and data elements were used. The primary goal of the highly transparent organization is to enhance worker engagement by increasing the level of trust in the system.
Today, many organizations are moving toward a culture that encourages more disclosure and dialogue.
5. Discuss next steps: Communicate to the employee the specifics about pay actions they’ll be receiving either to their base pay or to an incentive award; you can go one step further by discussing longer-term aspirations. Your discussion could include:
- Performance improvement tips – Reflect on the performance assessment. Are there specific things the employee needs to address in order to earn higher increases and payout awards?
- Expanded role opportunities – Would their financial aspiration be more feasible if the employee expanded their role or moved into different areas?
Armed with these communication tips, you can support a culture of pay transparency and improve employees’ understanding of pay decisions.
Our compensation experts can provide you with market data you need and help you make the data actionable for your business. If you would like to purchase the Aon 2018 U.S. Salary Increase Survey that has detailed information on merit increases by industry, or if you have any questions about merit increases and would like to speak with one of our compensation experts, please contact us now.