Friday, September 19, 2014

Pay Transparency: Compensation Models for the Future

Once again the federal government has rattled the cages of employers. If you haven’t heard the latest from the U.S. Department of Labor’s Office of Federal Contractor Compliance, you'd better read up, especially if you are a federal contractor or work for one.

The National Law Review reported on Sept. 15 that the OFCC issued a proposed rule that would bar federal contractors from firing or retaliating against people for discussing their pay or the pay of their co-workers. This proposed rule coincides with President Obama’s Executive Order 13665, signed in April, which requires pay transparency among federal contractors.

From a traditional HR perspective, compensation and pay “secrecy” has always been the norm for companies. I am willing to admit that I have been a supporter of policies prohibiting employees from discussing pay with co-workers. I have been in countless employee meetings where this has been discussed, given verbal or written warning notices for violations, but luckily have never had to terminate anyone for violating confidentiality of pay policies.

Why has it been the norm you ask? From a management and HR standpoint, it is not about trying to hide information from employees, but often based on the fact that employees are paid differently based on education, experience, knowledge, skills, abilities and performance. There isn’t a huge conspiracy by most employers to hide this information. They just understand that it is harder to explain differences in pay because employees often perceive themselves as being equal to their peers or even on a higher level than their peers. Think about it -- if employees knew how much their bosses or co-workers made, jealousy and feelings of being undervalued would follow.

That's the traditional argument. But I think it’s safe to say that because this is a fairly new concept for businesses to explore pay transparency shouldn’t be an idea that is automatically discredited.

Regardless of what employees do or do not discuss with their co-workers, each employee has ideas about what they make vs. their peers and superiors. Often this is very different from what the true reality of the pay structures within a company are. In recent studies it has been found that employees believe that their superiors make less than they really do and that their peers make more than they really do.

While this sounds very off base, has been studied repeatedly since the '60s. This harbors and discourages professional development and career growth within the company.

Think about it. If employees think they will only make a little bit more for increased responsibility, wouldn‘t they be more inclined to stay where they are? Or, even worse, seek opportunities somewhere else, where they can make more and grow in their career?

Additionally, employees who feel their peers make more than they do will tend to ask for higher raises or salaries, which can become awkward and problematic on both sides at performance evaluation time.

Let’s look at the opposite approach. Pay transparency and why it is something for companies to consider. I am not suggesting sending out a company email with everyone’s pay information to make sure everyone feels like they are being paid fairly versus their peers. What I am asking for us to at least be open to are policies and transparent company cultures that find a middle ground on this topic.

In a recent study done by Cornell and Tel Aviv University, the study found that pay transparency worked significantly better than pay secrecy in their experiment. While this was a small study conducted with students, the results were concrete. The test subjects who were allowed to discuss their pay and bonuses with peers outperformed the ones who were prohibited from doing so.

What does this mean and how can a company make this work? It’s actually not terribly difficult to accomplish. Creating aggregated pay and salary structures is a practice the most successful companies in the world already have in place. Each position in a company should have a compensation model in which there is a base/entry level wage, an average wage and a top performer wage. Implementing these and updating them based on market and uniformly and in compliance with employment labor law.

Taking this a step further is really where pay transparency comes into play. If an employees find out they are is being paid on the higher end of the structure, or even above the average wage, they may feel a sense of value, fairness and appreciation. For those that are paid under the average, this creates an opportunity to learn why they are under the average and what they can do to earn more. Overall, this engages employees in a way that cannot be measured monetarily and creates more loyalty within the company's ranks.

The cold hard fact is that your employees are talking about their pay. Silencing them hurts your company more than it helps. Just this once I suggest following the federal government’s lead and join the new way wave of transparent compensation models.
Monica Bitrick is CEO of Bitrick Consulting Group, an Idaho Falls human resources consulting company.