Use Pay Transparency to Build Trust in Merit Pay Conversations

September 13, 2017 Chris Kelley


Salary budgeting is underway for most companies and to the surprise of no one, merit increase projections for 2018 continue to be stagnant. The challenge many organizations will soon face is how to communicate the results of their salary planning process, especially when the size of the merit pool is, yet again, not all that inspiring. We previously outlined several compensation plan actions you can take, such as:

  • Performance differentiation
  • Using targeted adjustment budgets, or
  • Increasing the utilization of variable pay

We also suggested taking actions to educate and communicate, particularly drawing attention to the need for arming front-line managers with the right information and experience to be good communicators. Here, we take compensation communications to the next level by laying the foundation for pay transparency. Why do this? According to Aon Hewitt’s 2017 Trends in Employee Engagement study, the top opportunity for driving employee engagement is in the area of rewards and recognition. That study goes further to say that pay fairness is top of mind for many employees and there is an increasing trend for higher levels of pay transparency expected by employees.

What is Pay Transparency?

Transparency in pay is not a new concept, but surprisingly, there are still many misconceptions about what it is. Pay transparency refers to a level of communication within an organization about the pay philosophy, salary structures, plan design, administration practices, etc. One important limitation though is that pay transparency is not referring to the full disclosure of what each individual person is earning.

When pay transparency is in its best form, the level of communication about pay is truly a dialogue, meaning the communication flow goes both ways.

  • Organizations convey information to employees about the pay programs, and
  • Employees communicate to the organization what they value most

Built on a Foundation of Trust

Pay transparency requires a great deal of mutual trust between the organization and its employees. One caveat about pay transparency is that the degree of transparency has to ‘fit’ with the overall culture of the organization. A culture that supports pay transparency is built on a foundation of trust. In other words, you can’t have a culture of low trust where there is limited disclosure about most topics and then expect high levels of trust and disclosure related to compensation.

Here’s a trust challenge faced in many organizations - We all need to recognize that there’s no shame in employees wanting to earn more money. The challenge this presents for managers is twofold. First, the organization needs to create a culture where employees feel comfortable expressing their desire to earn more. And two, each manager has to be comfortable with helping employees find the path they can work towards to achieve their goal….even if it means leaving their current role, department, or yes, even the organization. The onus is still on the employee to perform and grow into the new levels or roles, but when a manager actively participates in dialogue to support the employee’s earnings goal, you have demonstrated high levels of mutual trust.

Communications Is the Cornerstone

When laying that foundation of a culture built on trust, remember that the cornerstone to that culture is communications. Organizations that promote a culture of clear, direct, and active language in their communications demonstrate leadership and build trust. This is one of the key points raised in Josh Bernoff’s article in the Harvard Business Review.

One shortfall many of us have when communicating is remembering the ultimate goal is not judging how well we send a message, but rather how well the recipient understands the message. How many times have we all heard someone trying to defend a situation where communications fell apart by saying, “Well, I sent you the email about this.”? Ensuring employees understand the messages you send is extremely important when it comes to the topic of communicating pay. For example, if your organization is facing a limited salary increase budget and you decide to limit increases to only those employees with the highest performance ratings, do employees interpret this as there being a salary freeze? If so, you can imagine how this misunderstanding will tear at the fabric of trust when employees find out that some employees actually did receive a merit increase.

Practice, practice, practice

Achieving a culture of high pay transparency is not easy and doesn’t happen overnight. You may hit bumps in the road where the level of information is too much or too little for where the culture of the organization is at any moment. You will be relying on a cascading flow of information involving many people who may be at different phases of their own skills when it comes to more challenging conversations. Expect that to be the norm and allow people (managers and employees alike) to practice, practice, practice this new behavior.

When you buy into the notion of pay transparency, your intent should be that more openness in communication leads to higher employee engagement. From there, a more highly engaged workforce is more productive and delivers greater results towards the goals of the organization. Being transparent with communications about compensation does not eliminate the challenges you may face you’re your upcoming merit increase conversations. However, you should find that employees are more likely to be receptive to the reality of limited salary increase budgets when you engage with them candidly, provide more details, and ensure that the messaging connects to the broader context of both the business performance and the overall career and pay aspirations of the employee.

Contact us for more information on purchasing the 2017 Salary Increase Survey results or to read more about Aon’s 2017 Trends in Employee Engagement report.


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