Remuneration: Having pay conversations with employees

Julian Hackenberg, HR Manager
By Julian Hackenberg, HR Manager

Talking to your team members about pay can sometimes be tricky, as it’s an emotional subject for most people and there can be a lot riding on it.

Obviously, if the employment relationship is healthy and based on open dialogue, respect, and trust, there is less chance discussions about money will get heated. Having a solid remuneration system that your people understand will also mean pay decisions are easily understood and communicated, which will reduce the chances of disagreements.

But there will be times when you need some effective tools and techniques that make it easier to manage these conversations. So let’s have a look at ways to ensure pay conversations with employees are objective and constructive.

Set it up

Like most things, preparation lays the foundation. Our earlier blog post looked at understanding remuneration and ways to approach it in your business. It’s all about setting expectations early, defining success, and preventing any surprises so that you and your employees are speaking the same language.

That means being clear with people from the outset (i.e. from the recruitment process) about what the business rewards and recognises. For example, is what you pay them based purely on their performance and development or do you factor in the business’ overall performance across a financial year and the person’s contribution to it? What are the company’s values and are there mentors and role models who can help them succeed?

Having an effective performance development system can really clarify employee and business objectives, and help define how you measure achievement and success. It will also help you monitor progress and identify top performers, employees who need some extra help or training, or people at risk of leaving.

Support decisions with data

A good performance development and review system will provide you with plenty of data to make pay decisions and provide transparency to your team, so you can explain how you came to a decision and how an individual’s contribution is measured. The last thing you want is employees not knowing how their performance or the business’ performance is being assessed.

Start by reviewing the role, the job description, the broader skill-set, and potential for development and growth. These should be framed within the overall objectives of the business. This is the sort of up-front work you should do each time you go to recruit, so you know how the role fits into the wider company goals and what you are looking for in an ideal candidate. This sets a benchmark that you can review against.

Using supporting data also means researching pay rates across comparable roles and the wider market - e.g. by using salary surveys - to make sure you know the value of someone’s work. That value has probably increased since you last did a review, whether that is due to inflation or ongoing skills shortages.

Separate pay and performance reviews

We say this one a lot: keep your pay discussions and individual performance reviews separate. Tying one to the other can really muddle things, as the pay conversation often dominates attention and when you’re evaluating and reflecting on employee performance, you really want that to be the sole focus.

Obviously, an employee’s performance is going to be a major factor when it comes time to talk about remuneration, but monitoring performance is most effective when it’s frequent and timely, whereas remuneration reviews may only happen at certain milestones, e.g. annually.

Performance discussions are about a person’s achievements, where they can improve, and their opportunities for development, while remuneration conversations centre on what the role and the person’s contribution is worth to the business.

Also, much more than individual performance should come into a discussion about pay. You want to look at how the company is doing, how the person's team or department is doing, the value of the role to strategy, market relativity, and other market factors.

For example, if your strategic focus is increasing digitisation and online sales, then a software developer who may not be performing at 100% is probably worth more to you than other, more basic roles. This supports your strategic goals and can be justified by market factors.

Get more tips for conducting effective performance reviews.

Check your bias

Basing decisions on data and measurable evidence has the added benefit of helping reduce the influence of biases in decision-making.

We’re all human and while we often see ourselves as impartial, our thinking can be affected by instincts, preconceptions, and learned prejudices. You also need to consider what you are measuring and rewarding, e.g. are your measures weighted toward behaviour that you prefer or that is attributed to one gender or set of cultural norms at the expense of others?

Reinforce the employee’s value beyond pay

What can get lost in tightly-focused pay conversations are broader methods of recognising a person’s efforts.

The way bosses and managers interact with employees on a daily basis, and recognise their performance, will likely be much more powerful and valuable to them than money alone. Research into the most important drivers of employee performance and satisfaction by Great Place to Work showed the one thing most workers wanted was employers to recognise them.

Meaningful employee recognition relies on it being specific, relevant, and timely. There’s not much to be gained from delivering vague platitudes about someone’s “good work” at an annual review 9 months after they won the company a new contract or delivered a big project on schedule.

Little things like personalising benefits or perks and connecting the individual’s work to the wider team, company picture, or their own development can often have more impact on motivation and long-term loyalty than money alone.

Think outside the box

At MyHR, we see many clients across industries getting creative with how they remunerate and reward their people. Many companies (including us) are in a heated labour market with significant skill shortages, such as IT professionals, engineers and technicians, tradespeople, health sector and agricultural workers.

Looking at things like retention and performance bonuses, investing in youth and training, and providing long service and other non-monetary benefits, like share options, can really add value to a remuneration package.

Some other things to consider are:

  • Understanding the true cost of recruiting and onboarding a new employee - could that money be better used to pay your existing workforce a bit more?
  • Developing clear and transparent career pathways so employees know what they need to achieve to earn more.
  • Creating other attractive and meaningful opportunities, e.g. training and development.
  • Restructuring how work is performed, e.g. a 4-day working week could increase productivity, and build a healthier, happier, more engaged workforce.
  • Rewards and recognition programs, e.g. values awards.

What if employees are unhappy with their pay?

Of course, it’s not always going to be possible to avoid employees being disappointed or irked with their pay or the outcome of a remuneration review. While you might be tempted to skirt the issue or shut the conversation down, you risk further denting the person’s morale and commitment to the business.

Here are some ways to get the best outcome out of these conversations.

Have a plan

Goal-setting is key, so set out a clear plan for the employee so they know what’s needed to get to the next pay increase, whether that is contributing more to the business, taking on more responsibility, or training and development with an eye on a higher-value role.

Make sure you include the person in the goal-setting process so you can count on their buy-in. Setting unrealistic expectations that the employee isn’t committed to isn’t a great recipe for success.

Don’t be afraid to have frank conversations

A big mistake that many employers (and managers) make, whether it’s about pay, performance or conduct, is not talking to their team members regularly and instead saving feedback for formal review meetings. Delaying those discussions actually increases the stakes and puts more pressure on both parties. Employees can often feel resentful for being blindsided and the whole discussion is made more tense.

Feedback is far more beneficial when it’s prompt and constructive, so don’t shy away from honest, open conversations with your people. If anything, it’s helpful to have them more frequently and in a less formal setting.

Involve employees

Another way we’ve seen employers get dissatisfied employees actively involved is encouraging them to do their own research into market pay rates. Once you’ve explained how your pay decision was reached and what metrics you are using, the person may be able to test this by going to the market or talking to a recruiter.

Patty McCord, former chief talent officer at Netflix, used this technique when dealing with employees who thought they could or should be paid more. She would tell them to go for job interviews with competitors to get a good sense of their market rate and send her the figure. She considered this valuable information for the business to keep up with the market, to recognise employees whose value had increased, and for the employee to understand their true market worth.

These conversations obviously aren't appropriate for every business or role, and are best framed in an open, honest way, so you achieve a solution where the employee feels satisfied with the outcome and you don’t lose them to a company with a better offer.

Reinforce the entire employee value proposition

Changing jobs comes with plenty of risk to an employee. While they may be focused on earning more money, there might be a wider range of benefits and advantages that you can offer them or that they are overlooking, e.g. an awesome manager or team culture, good work-life balance, generous additional leave, growth opportunities, unique projects, or the meaning that they get out of their job.

As we discussed in our earlier blog post, pay is a basic “hygiene factor” that you don’t want to get wrong, but there are many other factors that make up a compelling package that attracts and retains talent. People sometimes need to be reminded of these things.

Conduct a ‘stay interview’

While most employers understand exit interviews for people who have already resigned, ‘stay interviews’ can help managers understand specifics on why employees stay with the business and what has the potential to cause them to leave.

These employee check-ins can be used to level-set with people who are at risk of leaving or ones who have verbalised the desire to change jobs. Ask a range of questions, such as: what do you look forward to when you come to work? What do you like most or least about working here? If you could change something about your job, what would that be? What motivates you about your job? What demotivates you?

Not only do these conversations keep the dialogue open, they show the employee that you care, and they allow you to shine a light on things that aren’t just pay, e.g. the level of autonomy or development opportunities the person would like to have, or whether they can move to another position in the future (which helps with succession planning).

If you need more information or would like expert help in conducting remuneration reviews, please contact us.

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