Why Documenting Employee Compensation Decisions Is Essential

July 13, 2022
March 9, 2024
Andy Przystanski
Lattice Team

To say that documentation matters in Human Resources would be an understatement. Performance reviews, employee complaints, and other tough conversations are rife with compliance risks. For example, failing to keep a paper trail for a hiring, promotion, or termination decision might leave you on the losing end of a dispute, audit, or worse. 

Pay decisions are no exception. Documenting the who, what, and where behind each promotion and raise isn’t just recommended; it might be the most important administrative function in compensation management. It’s no coincidence that HR professionals are increasingly eschewing filing cabinets and spreadsheets for dedicated compensation management software to help ease the burden. 

We’ll discuss three of the top reasons why documentation is essential to your overall compensation strategy. 

1. It's a compliance best practice.

Let’s get this out of the way: Documentation isn’t just an HR best practice; it’s increasingly a legal requirement. Without exception, the HR professionals we interviewed brought up compliance and risk mitigation first. After listening to employment attorneys, it’s easy to see why.

“Not only is documentation critical, but it could also be mandatory,” said Brian G. Klein, co-founder of law firm Weinstein & Klein P.C. Klein noted that the laws around pay transparency and equity are quickly evolving, and companies ought to be able to substantiate all of their compensation decisions. In other words, documentation provides businesses with a first line of defense.

“[New York City] for example, will require employers to make public the salary ranges for open positions. Moreover, laws such as the Equal Pay Act protect individuals who become subject to discriminatory compensation decisions or practices,” Klein said. In addition to conducting regular pay equity audits, he recommended companies proactively review their compensation practices and documentation standards to ensure they’re protected. Time-consuming as that might be, “the pros likely outweigh the potential cons,” he said.

“Going forward, all employers should review their written policies and procedures with respect to compensation,” he said. “[That includes] metrics used to analyze starting salaries, raises, and bonuses to ensure that they are based on objective measures and fall well short of anything violative of the law.”

“It helps avoid disputes and misunderstandings...There’s less room for disagreement when everyone is on the same page.”

2. It gives managers and employees clarity. 

For all the talk of increasing transparency in the workplace, compensation remains notoriously opaque — not just with respect to salaries, but the decision-making process altogether. That isn’t just a hunch: A recent Lattice survey found that 67% of US and 64% of UK-based employees want more transparency about pay practices from their companies. 

For instance, understanding why a raise might be lower than expected isn’t only challenging for the recipient. Their manager may be just as perplexed by the final number and why it differs from what they recommended. This exchange, often played out in a performance review conversation or one-on-one, erodes trust in your compensation process and could even strain the relationship between the employee and manager. Having the right documentation can help bring clarity.

“In my experience, if employees understand the rationale behind pay decisions, they are more likely to trust the process and feel that their compensation is fair,” said Sarah Ross, a financial advisor and co-founder of CocoLoan. Before starting her business, Ross worked in HR for over a decade. Right or wrong, she knows employees tend to give most of the credit (or blame) to managers when it comes to merit increases. 

“Documenting these decisions helps HR professionals avoid disputes and misunderstandings…There’s less room for disagreement when everyone is on the same page,” Ross said. Providing managers with a place where they can easily reference communications between stakeholders across HR, finance, and department heads gives them the context they need to communicate the “why” behind a higher or lower than expected raise. It also reinforces that pay approvals are multilayered and often rely on more than just performance. 

3. It facilitates the link between performance and compensation.

Companies often seek to inspire teams by linking performance and pay. Employees seem partial to that approach: Lattice survey data shows that nearly two-thirds of U.S. workers believe their performance should be a significant factor in determining their pay. 

Unfortunately for HR teams, getting to that point — and ensuring the pay-for-performance connection is free of bias — is easier said than done. Documentation can play a supporting role in making compensation and performance management more equitable for everyone.

“It’s so important to document all aspects of the decision-making process, including who was involved, what data was used, and how the final decision was reached,” Linda Shaffer, Chief People Operations Officer at Checkr. Shaffer noted that the importance of documentation extends to reviews and ongoing feedback, too. After all, what are managers basing their merit increase recommendations on if they don’t have performance review ratings and comments to reference? Giving managers access to these records to influence their decision-making is imperative in any compensation review cycle.

“And don’t forget to ensure documentation is stored in a secure location and is accessible to those who need to see it,” she added. Integrated performance and compensation software can provide managers with an easy and secure way to reference performance reviews and peer feedback while considering merit raises.

Though essential, compliance and documentation represent just part of your overall approach to managing employee pay.

In HR’s Guide to Setting a Compensation Strategy, we’ll address how to answer the biggest questions relating to comp. From identifying your comp “philosophy” to designing salary bands that integrate with job levels, we’ll go through what you need to know for a more holistic, transparent, and equitable approach to employee pay. Learn more by clicking here