Did you grow up hearing that it was “tacky” to talk about money?
If you did, you’re not alone. Money is an off-limits topic for many Americans. According to a recent survey, a whopping 56% of American adults reported that they felt talking about finances with others was taboo.
There are a number of reasons that talking about money may make people uncomfortable. After all, money is a sensitive topic and can bring up a lot of emotions, both positive and negative. This is especially true in 2023 as consumers face high inflation and an impending recession.
However, as an employer, conversations about money, and specifically, compensation, are critical to running your organization. And how you approach communicating compensation, also known as pay communication, will affect how your employees see themselves and how they perceive your organization as an employer. Plus, transparency and openness surrounding compensation is becoming the norm, especially as more pay transparency laws go into effect.
In this quick guide, we’ll examine how you can more effectively communicate compensation to your team members. Specifically, we’ll cover:
- Why Is Pay Communication So Important?
- Creating Your Compensation Communication Plan
- 6 Best Practices for Communicating Compensation
If you’re ready to improve how you talk about compensation with your employees and promote transparency, trust, and deeper engagement in your workplace, this guide is for you. Let’s begin.
Why Is Pay Communication So Important?
From budget to individual performance to cost of living adjustments and more, there are a number of factors your organization has to consider when making compensation decisions.
However, not every employee is privy to the strategizing that goes into your compensation approach. So, once resulting decisions trickle down, they can be misinterpreted and misunderstood, even if those decisions were made with the best intentions.
This is why pay communication, or communicating compensation, is so important. When you’re proactively communicating to your employees how they’re being compensated and what they’re being compensated for, you can ensure that employees feel valued and fully understand any changes being made. You can also ensure that your compensation decisions are communicating your organization’s mission, vision, values, and strategic priorities.
Recent research shows the positive changes that can result in a workplace when pay communication is prioritized— a survey by Gartner, Inc. found that when employees know how their pay is determined, employee trust in the organization goes up by 10% and pay equity perceptions increase by 11%.
Creating Your Compensation Communication Plan
To boost trust and overall satisfaction and engagement in your organization, you need an airtight strategy for communicating compensation. To create your compensation communication plan, consider the who, what, when, why, and how of compensation at your organization.
Who Is Involved in Compensation Decisions and Conversations
Start your compensation communication plan by identifying the key players in compensation decisions and conversations. Your list will likely include:
- Organizational Leaders and HR Team: High-level leaders and HR professionals will likely be responsible for determining adjustments to compensation. Note that this responsibility is ongoing, as compensation practices (especially executive compensation practices) should be reviewed often, at least once a quarter.
- Compensation Consultants: According to Astron Solutions’ guide to compensation consulting, “the role of a compensation consultant is to evaluate an organization’s current approach to compensation and suggest actionable and sustainable changes that increase employee satisfaction and improve retention.” If your organization could use the help of outside experts in fine-tuning its compensation approach, working with a compensation consultant is a great option.
- Managers: Once decisions are made, managers will handle compensation conversations with their employees, often following performance reviews.
- Employees: Obviously, employees will participate in conversations about their own compensation. But more broadly, all employees should be included in communications regarding your larger compensation strategy. When you keep your employees in the loop, you’ll build trust with them.
Knowing everyone’s role in pay communication can help keep the channels of communication clear, and set expectations for employees about who they can turn to for information regarding their pay and benefits.
What Is Communicated to Employees
Updates about compensation should be clear and direct. In your conversation, you should go over the following with the employee:
- Direct forms of compensation currently provided and any adjustments made: Salary, bonuses, commissions, allowances, overtime pay
- Indirect forms of compensation currently provided and any adjustments made: Health insurance, retirement benefits, paid time off, company culture, perks
- When adjustments will go into effect: Specify when salary adjustments will be shown on paychecks or bonuses will be paid out, as well as when new benefits will go into effect.
In addition to discussing current changes to compensation, you should also take the opportunity to discuss with the employee what is possible in the future in terms of compensation. For example, you might go over bonus targets for the next performance period or discuss the employee’s raise expectations for future performance periods. Though compensation doesn’t need to be a taboo topic in the workplace, a compensation conversation presents a rare opportunity to have a truly candid one-on-one conversation about compensation and to align expectations and goals for the future.
When Conversations About Compensation Should Take Place
Individual compensation conversations should take place alongside or close to performance evaluations. It’s a best practice to schedule pay conversations separately, a few weeks after performance reviews, so that leaders, managers, and employees can fully focus on performance feedback. Then, these performance conversations can naturally lead into discussions about compensation.
More broadly, you should give regular updates about your compensation strategy in group communications, like team meetings. For example, if you’re announcing a new system for earning performance bonuses or sales commissions, you can walk your employees through these new processes and field any questions or feedback. This will not only keep employees informed about ongoing compensation decisions, but will also demonstrate to them that you’re keeping them in mind as you make those decisions.
Why Compensation Decisions Are Made
Your compensation communication plan should include the “why” behind compensation decisions. This should cover two elements of compensation: the current economic and financial context for your decisions and the underlying philosophy for your compensation strategy.
Economic and Financial Context
There are a number of factors that affect compensation, from your organization’s budget and market research for individual roles to inflation and labor supply and demand. But this context isn’t always clear when an employee sees the numbers related to their own personal compensation.
While you don’t have to dive into all of the details, don’t be afraid to explain the context behind different decisions. A simple “We’re adjusting your salary based on the average salary for similar roles” or “Bonuses this year are 3% smaller due to budget cuts” can go a long way in helping an employee understand the rationale behind decisions.
Your Compensation Philosophy
Your compensation philosophy is your position on and approach to compensation for your employees. Identify your compensation philosophy, and use it as the underpinnings of each of your decisions.
More and more, employers are turning to a total rewards approach to compensation, a philosophy in which both direct and indirect forms of compensation are incorporated. Compensation based on total rewards allows you to demonstrate to your employees how much you value them, and to provide different forms of compensation to benefit different parts of the employee’s life, from their financial needs to their well-being at work.
Learn more about total rewards by checking out this quick explanation.
How Compensation Is Communicated
Compensation conversations should take place face-to-face between managers and employees. Note that it may be helpful to send information about compensation directly to the employee before this meeting, giving them time to digest the information and come prepared for the conversation. This gives the employee room to react to news about their compensation changes without the pressure of a manager seeing them react in real-time, and also adds a buffer of time so they can compile any questions before the meeting.
Broader information about your compensation philosophy and general updates to your strategy can be communicated in meetings or through written communications, though big announcements shouldn’t be buried at the bottom of a company newsletter or given without full context.
6 Best Practices for Communicating Compensation
Once you’ve set up your compensation communication plan, having effective compensation conversations can still be challenging. Consider these six pay communication best practices before your next compensation conversation!
1. Thank the employee for their hard work and commitment to your organization.
Conversations about compensation can be tense, and negative ones can impact your employee retention. Start these talks on a good note by emphasizing employees’ prior relationships and work with your organization. This provides context for why certain compensation decisions were made.
Additionally, while payment decisions are usually based on employees’ prior work, ensure these discussions also have an eye on the future. Express confidence in each employee’s continued contributions to the organization and how pay adjustments fit into your expectations for them going forward.
2. Don’t focus on why the pay adjustment isn’t larger.
One of the most common scenarios for compensation conversations is around bonuses. For example, you might offer employees up to $20,000 in bonuses a year based on their past performance. Some employees who receive less than the full $20,000 may feel they were paid adequately based on their prior work, whereas others may have questions.
Ultimately, don’t dwell on why a bonus is not higher. Be able to clearly explain what criteria were used to make the decision on the employee’s pay and link your decision to specific examples of the employee’s past work when possible. Know that some employees may try to negotiate different wages, so begin conversations by setting the tone of whether you are open to these types of discussions at this time.
If an employee requests more information about why their pay adjustment isn’t larger, confer with HR to provide them with information in a professional manner.
3. Communicate non-monetary bonuses.
A lot goes into determining appropriate employee compensation packages, and part of your conversations with team members should be about what they can expect in addition to their base salary.
When preparing to discuss compensation, be ready to speak to:
- The bonuses your company offers and why. While many bonuses are standard, you should still be able to speak to your company’s decision to offer them and what you want employees to get from receiving them. For example, if you have an employee giving program, you might explain your philosophy on giving back to the community.
- The value of these bonuses. Approximate the monetary value of the bonuses you provide employees. In some cases, this might be straightforward, such as employer 401k matches, while in others you may need to approximate, like the value of an unlimited friends and family access pass.
- Alternatives. For certain bonuses, some employees may prefer to reject the bonus in favor of receiving the cash value. The most relevant bonus when it comes to discussing alternatives is healthcare coverage, which some employees may prefer to reject in favor of seeking a separate plan from what your company offers. Be ready to discuss the financial trade-off and what steps employees interested in rejecting the bonus need to take.
Ultimately, conversations about bonuses and non-monetary perks should be straightforward, but ensure your team is ready for any questions employees may have, especially if your additional offerings differ from standard compensation packages.
4. Follow up with HR with a written document for employees’ files.
Compensation changes are a formal matter and should have corresponding documentation ready when they’re announced. A personal copy should be sent to the employee’s home address, emailed to each employee through their secure email address, or given to the employee in person.
In addition, some jurisdictions have laws regarding compensation change communication requirements. Be sure to know and comply with your local laws in this area.
5. Ask for feedback.
Encourage your employees to provide their thoughts on your organization’s compensation strategy and approach to communicating compensation. You can do this through internal surveys or during compensation conversations. For instance, you might ask questions like:
- Are matters of compensation clear and transparent?
- Do you feel comfortable asking questions about your current compensation?
- Are there remaining concerns about compensation that were not addressed in prior compensation-related meetings?
These questions can be anonymous or connected to specific employees. Anonymous questions will make employees feel more comfortable about providing honest feedback with the trade-off of being unable to follow up with specific questions and concerns.
6. Don’t hesitate to tap into outside expertise.
For pay communication improvements tailored to your organization, reach out to a compensation consultant. These HR professionals can help you handle compensation at every part of the employee lifecycle, setting you up to compensate your employees fairly and retain top talent.
Some employers may feel like the most comfortable time to discuss pay with an employee is when the employee is first hired. That initial conversation is only the starting point, however. Compensation conversations must happen on an ongoing basis. By building out your compensation communication plan, you can set the foundation for productive discussions that lead to stronger trust between you and your employees. Such trust is essential for attracting, retaining, and motivating your organization’s human capital.
Looking for further reading? Check out these recommendations:
- Pay Transparency: What It Is & How to Navigate New Laws. It’s likely that your organization will soon be required to comply with some sort of pay transparency law. Learn the basics in this guide!
- Compensation Surveys: What They Are and How to Use Them. Compensation surveys can be a great asset for strengthening your compensation strategy. Learn more here.
- HR Consulting Firms: 20+ Top Providers for Small Businesses. HR consulting is a great option for organizations looking to build stronger relationships with their employees and prepare for sustainable organizational success. Learn more in this guide!
- 2023 Compensation Trends Your Org Should Know About. Stay up to date on compensation trends to keep your own strategy in tip-top shape.