Not only is compensation key to attracting top performers, it’s also important to retaining them. Compensation consistently ranks as a leading factor in employee satisfaction, and according to a Gallup survey, 41% of jobseekers say that they expect a “significant” increase in income when choosing a new role.
Given the changing economy and shifting employee demands, it’s more important to ensure employees are clear on how compensation decisions are made, how their performance is linked to salary increases or bonuses, and that they have trust in HR teams to provide compensation equity across the organization.
Wages and Inflation
According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) in September 2022 increased 8.2% over the last 12 months. While salaries have been increasing, real wage growth is being outpaced by inflation. “Real wage” refers to compensation in relation to the cost of goods and services.
This impacts some companies more than others: According to pay data from ADP, industries like leisure and hospitality are seeing 12.1% median changes in salaries, where goods-producing sectors like construction are seeing 6.7%. From a compensation standpoint, it’s important for organizations to consider where they are relative to other organizations within their industry, as this varies.
How to Respond to Inflation
Responding to inflation, let alone a recession, is never simple. Still, there are certain things HR teams can do to help alleviate the pressure of high inflation on employees. These three steps offer a helpful start.
1. Communicate a clear compensation philosophy.
It all starts with your compensation philosophy, which provides guidelines around how an organization pays and rewards employees. Most employees who are disappointed by compensation decisions likely don’t have the right expectations to begin with, and that's where having a compensation philosophy comes in.
By clearly communicating how and when people are paid, this not only holds HR teams accountable but also allows employees to understand what’s standard within the organization. Without that context, they may be seeking external benchmarks that are skewed or unrepresentative of your company size or industry.
2. Refresh your market data.
As part of establishing your compensation philosophy, you should be looking at compensation data from comparable companies. Publicly available market data is usually reported as national averages, so consider looking at more specific sources or surveys that help you target particular companies.
HR tends to be a small community, so you can leverage your network or Lattice’s Slack community, Resources for Humans. Companies like Aon leverage Radford and McLagan compensation surveys to provide industry-specific benchmarks. WTW and Mercer also provide salary surveys. With the pace of change and amount of uncertainty we’ve all experienced over the past few years, it’s recommended to revisit your market data frequently to make sure you’re still using the most relevant numbers.
3. Review your total rewards package.
Even if your company’s specific circumstances don’t allow for large salary increases, remember: Compensation is about more than salary. There are other opportunities where companies can help address inflation, for example, by helping employees cover gas or commuter costs, or providing financial assistance options for those looking into home purchases.
Look at your total reward package, which can include benefits like health insurance, wellness programs, vacation time, and more. Importantly, total rewards need to tie back to your compensation philosophy so employees understand what’s available, who’s eligible, and why.
Making ‘Pay-for-Performance’ Work
Lattice’s 2023 State of People Strategy Report found that 83% of HR leaders believe compensation and performance should be linked. What’s more, the report found that HR teams meeting or exceeding their goals were much more likely to link performance and compensation. A breakdown of the relationship between HR performance and pay-for-performance can be found here.
Still, connecting the two is often easier said than done. In order to successfully link compensation and performance, there are few things you need to keep in mind.
1. Leverage quantitative performance data.
In order to make compensation decisions that are based on performance, you need to have some kind of metric to evaluate individuals. Performance ratings were traditionally a main input for decision compensation increases, but HR teams now have more quantitative data at their disposal, such as metrics around goal attainment.
It may not make sense to tie goals to compensation for all roles. Consider the nature of the work and what goals or metrics you can track. For example, sales teams are very metrics driven, with set sales quotas to be met to earn commission. On the other hand, for teams like engineers and HR, or teams that have highly collaborative roles, compensation may be linked to behaviors or milestones.
Overall, goal attainment is helpful for employees to understand progress, even if there isn’t a specific dollar amount tied to the outcome. As long as expectations are clearly set at the beginning of a performance period, you can vary pay for performance between teams.
2. Focus on pay and performance transparency.
Transparency in compensation ties back to your compensation philosophy, and allows employees to understand how compensation and performance ratings are determined within the company. Employees should understand how high performance can lead to promotions and raises.
One of the things that transparency also helps with is enabling equity in your performance and compensation cycles. When there is transparency in the process, you’re encouraged to talk about expectations at the beginning of the performance cycle, including what outcomes, behaviors, and goals will impact compensation or promotion decisions. Communicating these guidelines at the company, manager, and individual levels allows you to be more data-driven about whether expectations were actually met.
3. Separate growth, performance, and pay conversations.
At year-end, some companies combine performance, development, and compensation conversations into one review. From an employee perspective, staying mindful of all three in one session is impossible: Compensation is almost always going to win out because financial security is a basic need.
Instead, break the three out separately. Do performance check-ins throughout the year, and then have your year-end discussions focused on development: where you are in the organization, where you want to be, and then what skills or competencies you need to develop to get there. Then you can have the compensation conversation after that. This also ensures the compensation cycle takes into account the latest performance ratings.
The Value of Compensation Tools
Leveraging compensation tools within an organization can help lead to greater transparency, greater security, and overall better decision-making. According to Sapient’s HR Systems Survey Results, a full 87% of large organizations (5,000+ employees) are using or are assessing compensation-specific technology. Small and medium sized companies have increased their adoption of technology as well.
1. They enable greater security.
Without a secure platform, HR teams are often sending salary and compensation data via email or worksheets, which can lead to sensitive data falling into the wrong inboxes and hands. Whether or not you want to share compensation data with your general employee population should be part of your compensation philosophy, but even if it is, you don’t want it to be done accidentally or unintentionally.
2. They empower you to collaborate.
Compensation decisions are rarely made by one person. They involve an employee’s manager, department head, executive leader, and the compensation team. Trying to collaborate via multiple versions of spreadsheets is inefficient and can lead to errors. A compensation tool can often speed up the process because different people can collaborate asynchronously and see all the criteria in one place, instead of waiting around for someone to reply to an email or review a spreadsheet (or, worse yet, not waiting).
3. They allow you to stay consistent.
Compensation is often cited in exit interviews as a big reason for leaving an organization. But along with compensation, employees also leave companies when they don’t have the confidence that the organization is going to meet the requirements or commitments that they've made over time. Compensation tools allow you to stay consistent with your strategy because they allow you to pull in performance information into a tool to allow you to make decisions based on data and pre-defined criteria.
With inflation hitting a 40-year high earlier this year, organizations need to make sure they have a compensation strategy in place to navigate uncertainty. Learn how Lattice's Advisory Services and software can prepare your compensation strategy for what lies ahead by scheduling a call with our team.