Compensation

How to Adjust Your Compensation Strategy for a Changing Economy

September 16, 2022
September 28, 2022
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By 
Lattice Team
Lattice Team

What do aircrafts and employee compensation have in common? They’re both thought to have (or be) a “black box.” But while flight recorders are actually fluorescent orange, compensation strategies have long been cloaked in mystery. That’s changing, though — and fast.

“What we're hearing from employees — and what we're here to say — is: It’s time to break that ‘black box’ open,” said Julia Markish, Director of Lattice Advisory Services (LAS), in a webinar about building (or adjusting) compensation strategies in today’s economic climate. 

In a wide-ranging conversation, Markish and her colleague, VP of Lattice Advisory Services Dave Carhart, shared new data from a recent Lattice study that provides insight into how modern employees think about compensation amid inflation and nationwide spikes in the cost of living

“There's so much hunger for information [about compensation] precisely because a lot of companies hid it away and put it off limits for a long time,” said Carhart. 

In this webinar, Markish and Carhart discussed how People leaders can:

  • Better meet employee compensation expectations
  • Prepare for new regulations that promote a culture of “radical transparency” 
  • Equip managers to navigate compensation conversations with employees
  • Work toward more equitable compensation practices — with limited resources

The Dynamic Macro Environment

We’re in a “dynamic moment,” said Carhart, who noted that there are five primary factors “forcing a lot of change and a lot of updating of compensation strategy right now.” These factors are:

1. The Economy

As we look toward the last quarter of 2022, the economy in the US is perhaps the very definition of the word ‘uncertain.’ Add to that the ongoing supply chain disruption, the war in Ukraine, and COVID-related shutdowns in China. Meanwhile, interest rates are rising fast

“We know that there's going to be some type of slowdown, some real risk of recession,” Carhart said. “Some companies have had to move into layoffs, but I think in most places companies need to move into a much more cautious stance, preserving cash.”

2. Labor Markets

The Great Resignation and the Great Reshuffle have been hot topics in the HR space for many months. Now, inflation is further upending everyday life for millions of Americans. 

“There's been a lot of competition for talent [for years],” Carhart noted. “Looking into the numbers, the different government reports…what we see is that despite the slowdown that's coming in the economy, talent markets are still just incredibly tight. Whatever sort of small changes or declines in the number of jobs open, we're still at historically tight levels. That's still driving a lot of pressure on compensation — from candidates and from employees, too.”

3. Hybrid and Remote Workplaces 

Going “back to the office” isn’t universal. The COVID-19 pandemic proved that remote work can work for some roles (or entire organizations). Other companies, like Lattice, are navigating a hybrid approach. The bottom line: More than ever, qualified candidates seek positions with remote or hybrid flexibility.

4. Demand for Transparency and Pay Equity

Employees of all ages value a straightforward and fair approach to compensation. These issues are “top of mind for a lot of employees,” said Carhart. Transparent business practices and strong company cultures go hand in hand, but striking the balance of exactly how transparent a company should be isn't easy.

5. Regulatory Environments

It’s right on the horizon: November 1, 2022. That’s when, following the lead of Colorado, Washington state, and others, New York City will require a “good faith salary range for every job, promotion, and transfer opportunity advertised,” according to a press release from the NYC Commission on Human Rights.

It’s a “shift to proactive disclosure,” said Carhart. 

Companies will need to post compensation bands on job postings for any job that could be done in New York City, including remote positions. That means transparency about significant aspects of compensation will no longer be optional for many organizations — and will likely have a domino effect.

Many companies aren’t ready for this seismic change, but “trying to get ready in October is going to lead to a lot of issues,” cautioned Carhart. 

Transparency, Equity, and Expectations

Transparency has been a long time coming. “Folks are ready for it. And transparency has been such a beating rhythm, and not just about compensation. Folks have been asking for transparency in processes, transparency in the way that we're hiring, transparency across the board — in the way that we're running businesses, for employees as well as consumers,” said Markish. “It's been a growing theme for a couple of decades now. It looks like this is just the next wave of that theme.”

According to a Lattice survey of over 2,000 US-based employees about compensation policy and pay transparency, two-thirds of employees said that their organizations should be more transparent with pay policies. And just over half of respondents said their organizations should share how much everyone is getting paid. 

“We're talking about radical transparency — and there are companies out there doing that,” Markish said. She thinks it’s a trend that’s here to stay. 

Although employees’ opinions vary based on generation, according to Lattice research, younger workers  are leading the charge, with 72% of Millennials saying that employers should be more transparent with their pay practices, followed by Gen X workers at 65% and Gen Z at 61%.  

When it comes to gender disparities, Lattice research revealed that three-quarters of men report having a clear understanding of how their organizations decide their compensation, but just under two-thirds of women feel the same. Although these statistics are about perception, it “really speaks to the insidiousness of the gender pay disparity and how much we need to fight it on a systemic basis so that this perception, wherever it comes from, is equalized,” said Markish.

Gender disparities in employee experience with compensation.

Over half of Gen Z and Millennial employees believe gender, age, and racial biases influence compensation at their companies, Lattice research found. Many Gen Xers and Boomers do as well (with 42% and 31% of these cohorts agreeing with this statement, respectively). Almost a third of respondents (of all ages) think their employers aren’t doing enough to address bias in the compensation review process. 

Perception of bias and employer inaction.

Lattice also asked study participants to rank factors they believed should influence their pay. “We saw a number of factors across the generations,” said Markish. “But it was really interesting to me that work performance was the winner…ahead of the cost of living, skills, and education level.”

At Lattice, “we’ve seen quite a bit of shift away from pay for performance,” she added. 

“A lot of our customers are starting to think that maybe this isn't the right way to motivate employees, and yet now there's this disparity between that mindset and what employees say they think their pay should be tied to,” Markish said.

What should employers consider when evaluating compensation?

Perhaps the most surprising data from Lattice’s study came from a question about how often employees expect compensation increases. 

“This is not what we expected because the majority of our customers run an annual comp review,” said Markish. “But we saw that over half of employees expected comp increases more frequently than once a year, and almost a third expected them to happen every one to two quarters if they're meeting or exceeding expectations.”

Expectation of compensation adjustment frequency

Markish realized the expectation of more frequent comp increases “is actually in line with the rest of our lives these days,” she said. “This is the era of instant gratification and immediacy. So why should employees wait a year to have their comp adjusted — especially if other things like performance reviews and feedback are coming on a more consistent basis?” 

How to Build (or Refresh) Your Organization’s Compensation Strategy 

The compensation equation is more than just salary and benefits. Ideally, an organization’s strategy for determining compensation should be what Lattice calls a “total rewards philosophy,” including:

Total rewards compensation strategy

It’s important to make sure a foundation exists that can support an organization’s policies “beyond any individual decision,” said Carhart. “That we're grounding [policies] in things like company values and People strategy.”

The questions Lattice asked in its study mirror the same big questions every organization should ask itself: 

Base salary, bonus and equity, and benefits and flexibility are pretty straight-forward. Here’s a closer look at the three other key elements of a total rewards philosophy:

1. Process and Analysis

Process and analysis involves questions like how often an organization should change, or at least review, compensation, and how the company analyzes compensation to ensure they’re paying employees equitably — with the offer, during a focal review, and at other times during the year.

“As People leaders, [we need to] lean into engaging with employees on this topic and not wait for it to be folks asking the questions first,” said Carhart. “Let's start during onboarding…[or] even during the offer process. Walk people through how we think about compensation and provide them with that information. Set up people's expectations upfront.”

If an organization only enacts pay changes or reviews once a year, “be open and direct with that,” he advised — “so whether people agree or disagree, at least they know what to expect.”

2. Job Architecture

Job architecture is an area that’s often skipped over, said Carhart. This category encompasses “all of the behind-the-scenes foundational levels: competencies, job families…how folks relate to the work that they're actually doing,” he explained. “Almost everything else in comp is built on top of that.”

While it can be difficult to convince organizations to establish robust job architectures because it doesn't seem to yield immediate benefits, “it’s important to break down the whole of compensation,” Carhart said. “Beyond any individual question that we're dealing with, what's the longer-term structure across a number of different core elements [like] base salary, different forms of variable compensation, and other types of total rewards.”

Carhart has seen studies and polls suggesting that some employees are willing to trade a (relatively) lower salary for more flexibility in areas like work hours and remote work options. “It's something that people really are willing to put a dollar value on,” he said. 

3. Transparency and Education

While more companies than ever value transparency and education, “some folks don't necessarily put it in the compensation strategy bucket,” said Markish. “Being holistic about not just how we're building [compensation strategy] — and what we're building — but how we're communicating it back to folks, [is] such an important aspect of making sure [compensation] is equitable and making sure people actually see that.”

Markish noted that communication isn’t just about People leaders’ messaging efforts. “I don't think many folks train managers [about how to] talk about compensation with our people,” she said.

Leading With Empathy

“Sometimes when we talk about benchmarking and analytics and all of the different kinds of ‘spreadsheet’ elements…[we] maybe turn compensation into a quantitative exercise,” said Carhart. “The reality is, compensation is deeply personal. Whether rightly or wrongly, it is one of the ways many of us judge…self-worth.” 

Compensation conversations can be difficult. Employees might think, “How much does this company value me? Am I being respected, recognized, and treated appropriately?” Carhart explained. “And sometimes it doesn't always match up with the spreadsheet,” he said. So it’s critical to support managers with training that can help them communicate with employees in a compassionate way.  

When he had his first compensation conversation as a manager, he was “terrified,” Carhart recalled. “It gave me so much more empathy for the kind of support [managers need]. These can be complex and hard conversations.”

Even if compensation strategy isn’t a “black box,” Carhart added that “there's a lot more work that we need to do around the narrative [about compensation decisions], communication, and engaging employees.”

Luckily, Lattice provides many tools, research, and resources, like our new eBook HR’s Guide to Setting a Compensation Strategy, to help your organization create a more holistic, transparent, and equitable approach to employee pay.

This article is based on a webinar hosted by Lattice, the complete People success platform that helps companies put its people first. Take a sneak peek at the new Lattice Compensation platform or request a demo today.