Fair compensation means learning how to pay employees in a reasonable way without getting anyone mad.
In real-life business, two people almost never have the exact same skills, experiences, seniority, work ethic and personality traits. Likewise, they rarely have the exact same job responsibilities. Only in the most rigid and anti-incentive environments do any two people always get the exact same pay.
At well-managed companies, governments and organizations, there is only structured and flexible compensation that follows a policy which relies on facts and logic. A good pay plan is a win-win for both the company and the employee. It’s like a marketplace trade between two partners: better results for more money, more money for better results.
For these reasons, companies, governments and organizations often have pay ranges for each position (except at the executive level, which anymore has no limits). Fair doesn’t mean equal. It means rational for both the company and the employee.
But even when fair compensation is based on logic and incentives, managers and workers risk a blow up if compensation conversations aren’t handled carefully.
How to Discuss Fair Compensation
Badly managed companies either have bad compensation policies, or they do a terrible job at implementing them. They are the ones with the biggest risk for making their employees mad, demoralized and likely to go find a new job.
The risk of a blowup over compensation often comes in one of five ways:
- One employee tells another how much he or she is making. The other employee is making less in a similar job. Anger, jealousy and resentment are common reactions, directed toward the employee, management or both.
- An employee who thinks he or she is doing a great job expects a big pay raise. The raise is smaller than expected.
The company has to make changes to the existing compensation program. This change especially impacts anyone who receives bonuses or commissions.
- An underperforming or misbehaving employee doesn’t get any raise.
- No one gets a raise at the end of the year.
The Blabbermouth Employee
The blabbermouth tells someone else how much he is making. The other person discovers she is making less and resents it because she has been there longer, or she has worked harder, or she has a master’s degree and he doesn’t.
The employee who is making less now resents both the other employee and the boss. He also may wonder if the boss doesn’t like him. He may start to look for a new job, even though the boss really does like him.
Any good rarely comes from employees sharing their pay with each other.
- The Lesson: Managers should share the policy, facts and logic behind employee compensation, but they also should explain to every employee that individual compensation is confidential. They should communicate that policy when they hire a new employee and repeat it when they give raises.
Employees With Big Hopes
Younger employees tend to have bigger hopes and expectations about compensation. Older employees may have learned otherwise through experience.
Someone who works harder than other employees certainly should get rewards for the effort. But rewards like big raises are sporadic. They depend on many factors such as HR policies, whether the company is having a good year and how well the operating unit is doing.
- The Lesson: Conversations about fair compensation that may disappoint employees should start with a review of policies. For example, new employees should know that the company last year had average raises of 3 percent and that 3 percent is 1 percent higher than inflation. A new employee may wonder how to do better than 3 percent. The typical answer is that a small number of employees get more than 3 percent and employees who are promoted can get more.
No Raise for Misbehaving or Underperforming
Many workplaces have pay ranges. Employees should know their entire range and that they can get raises higher than the average. But they also need to know they can get raises lower than average. Lower ranges go all the way down to zero.
Employees who receive no raise or a small one are getting a major signal about job trouble. It’s time for them to either fix the problem or leave the company. Regardless, that kind of message is of course upsetting. An employee who receives no warning is highly likely to have a strong emotional reaction.
- The Lesson: An employee who gets a lower raise than average or no raise at all should already know or suspect what’s about to happen. They know or suspect it because the manager has already warned him or her about behavior or performance problems, at least with verbal warnings if not written warnings.
Compensation Policy Gets a Reboot
In a real-life situation, a startup within a large media company had exceptionally high commissions and bonuses for salespeople. The startup grew by 10X in less than five years.
In a few more years, the compensation plan literally could pay a sales manager with a staff of eight people more money than a top executive at the same company in charge of nearly 1,000 people. The compensation plan needed a reboot as soon as possible. Employees affected by the change soon realize they may make not nearly as much money in a few years as they expected.
- The Lesson: Fair compensation plans in special situations that vary from overall company policies require frequent review by managers. Managers also should warn employees that the plans have a short lifespan because of the special situation. In the long run, a plan should balance risk and reward for both the employee and the company.
No One Gets a Raise
Not a single person except executives at this actual company got a raise for seven years. The industry was in decline. Layoffs were frequent. Other companies in the same industry were also in decline and not hiring.
That meant this particular company had employees who couldn’t leave easily for another job in the same industry. So many of them stayed and accepted the fact that they received no raises for seven years. Even worse, the company froze the pension plan, eliminated the 401k match and reduced its share of health insurance.
- The Lesson: A company in poor financial condition, especially a public company, is giving managers plenty of factual ammunition to share with employees about the lack of raises. The manager may find that taking the approach of “we’re in this together” will help alleviate the pain and avoid personal confrontations. That said, the situation is unhappy for everyone.