Best Practices on How to Handle Compensation Conversations with Employees

Compensation conversations can be awkward, even for seasoned HR professionals. Most employees don’t relish the experience either.

Why?

Talking about money is weird — not just during pay conversations. Isn’t it a strange dance when the check shows up at dinner with friends? Didn’t parents and teachers tell us it’s rude to talk about how much — or little — money we have?

Compensation conversations — no matter how professional they sound — are still about money. And it’s almost always going to be a little weird.

Lead Effective Compensation Conversations with Employees

But it’s more important than ever to get compensation conversations right because pay transparency is growing. In fact, more and more states are enacting pay transparency laws. For some HR pros, you have to stay in compliance with pay transparency laws.

For others, you want to stay in line with the norms in your industry or locality. For instance, Pearl Meyer’s Workplace Policies and Pay Transparency survey found companies are taking steps to improve pay discussions. Specifically:

• 30% communicate key aspects of their compensation philosophy to all employees.
• 29% train managers on having effective compensation discussions.
• 25% conduct a Comp 101-type session with managers and/or employees.
• 18% inform all employees about any changes (whether driven by legislation or done voluntarily) and how they impact them.

To say the least, compensation conversations are on center stage (even though they’re normally in private settings!)

Best Practices for Discussing Total Compensation Packages with Employees

They aren’t always easy either. Seventy percent of managers admit they’re uncomfortable having these kinds of conversations with employees, according to a West Virginia University study.

But if you focus on delivering the information in a sensitive and empathetic way, while being
clear and direct, you’ll have an effective conversation that most employees consider a positive experience.

Here are strategies to help you lead effective compensation conversations with employees.

A Roadmap for Discussing Pay

To prepare and execute the pay discussion, follow WVU’s ABCDE Technique:

• Advance Preparation. Prepare what you will talk about and how you’ll communicate important information.
• Build a sense of trust. As we said above, arrange a private, interruption-free meeting with plenty of time to cover the information and respond to questions or concerns.
• Communicate well. Be clear and direct when you explain pay decisions. Ask the employee to recap so you’re certain to be aligned on what was discussed and what will happen.
• Deal with reactions. Some employees may not be happy with the compensation conversation. Listen to and acknowledge their responses.
• Encourage and look forward. Identify and correct any confusion or misunderstandings when it comes to their total rewards package. Discuss what the decisions mean for the employee’s future and outline the way forward.

How to Handle the Numbers in Compensation Reviews

Many employees will come in with numbers on their minds — some realistic, some not so much. HR pros and managers who handle compensation conversations will want to be prepared with a total rewards strategy that is fact- and number-based. Again, WVU offers a practical tool.

“Salary ranges are determined by matching {company} benchmark positions to benchmarks in salary surveys,” the researchers said.

You want employees to understand that their salary, benefits and/or bonuses are based on your market and their performance. There are real numbers and data behind compensation reviews.

So prior to the compensation conversation, calculate and consider the employee’s current compensation ratio and what they know about their current pay range. To help them better
understand:

• Provide them with their job description, and
• Discuss how the role these factors play when determining pay:
  • Available Budget
  • Performance
  • Job responsibilities
  • Education
  • Experience, and
  • Market value for their specific role and skill-set.

Explaining Bonuses and Incentives During Compensation Meetings

Talking about pay is one challenge. Add bonuses, incentives or performance-based compensation, and you create the potential for confusion and different challenges. But none that can’t be overcome.

What’s important when explaining bonuses and incentives is to be transparent and clearly outline:

• Ways to earn additional compensation beyond their base salary, such as individual and/or team-based incentives, company-wide performance goals
• Specific performance metrics tied to the bonus
• The calculation method
• The potential payout amount
• Eligibility criteria, and
• Potential limitations or restrictions on bonus payouts. 

More specifically, you’ll want to cover these key points when discussing bonuses and incentive programs:

Bonus Plan Structure

• Performance metrics: Explain the key performance indicators (KPIs) you use to determine bonus eligibility and the potential amounts to be paid. Those might include sales targets, project completion rates or quality standards. 
• Weighting system: When you use several metrics, make sure employees understand how each factor is weighted in the bonus calculation. 
• Target goals: Show the specific targets employees need to reach to get the bonus. If you have thresholds or tiers for partial payouts, show them the structure — and have employees sign off that they understand all this. 

Calculation Method

• Percentage-based: If the bonus is a percentage of salary, explain the calculation formula and how you apply it to performance metrics. 
• Fixed amount: Reiterate the conditions for attaining a fixed amount bonus. 
• Performance-based: Clarify how individual or team performance will be measured and translated into their bonus. 

Eligibility Criteria

• Employment status: Let employees know if they are eligible regardless of status or if they must achieve criteria such as tenure or job level. 
• Performance review requirements: Make clear the necessary performance review ratings to be eligible for a bonus.
• Attendance and compliance: Explain any attendance or adherence to company policy factors that could impact bonus eligibility. 

Payment Schedule

• Bonus payout frequency: Everyone wants to know when they’ll get paid! So explain when bonuses will be paid out and whether it’s a one-time payment or distributed over time. 
• Tax implications: Clearly explain how bonuses are taxed and the potential deductions. 

Other Important Considerations

• Alignment: Make sure the bonus structure and compensation packages support the company’s strategic objectives. 
• Fairness and equity: Work with the executive team to design a bonus system that’s fair and equitable across different roles and levels within the organization. 
• Clarity: Keep the bonus structure understandable and avoid overly complicated calculations. 

Managing Employee Expectations in Compensation Adjustment Discussions

Most employees will come in with expectations to get paid more. And you might not be able to do that. So you’ll need to manage employee expectations in compensation discussions as much as you need to manage the conversation.

Why Employees are Misaligned

First, understand why employees might walk into salary talks unprepared to hear what you have to say:

• Unrealistic expectations: Employees might have salary or bonus expectations based on unsubstantiated perceptions or market trends. 
• Internal equity issues: They may feel they aren’t fairly compensated in relation to what they do within the organization. 
• Disappointment: Some employees may come in already upset with how they’re compensated, so they expect adjustments that aren’t in line with company realities. 

Key Strategies to Address Expectations

When employees have expectations that are misaligned with company realities, you want to:

• Be transparent about the process: Re-explain the criteria used to determine bonus payouts or compensation adjustments. That will likely include market analysis, performance evaluations and company budget constraints. 
• Be personal: Don’t use stilted, canned speeches. Instead, focus on each employee’s specific performance and contributions and how those impacted your decisions. 
• Set clear expectations: Cover the range of adjustments – from none to the high end – for compensation and/or bonuses based on performance and market factors. Avoid unrealistic promises. 
• Provide context: Explain broad economic factors that influence the company’s ability to hand out raises.
• Acknowledge achievements: Highlight employees’ accomplishments and positive contributions. 
• Listen actively: Allow employees to ask questions, express concerns and give feedback during the conversation. 
• Be prepared to address concerns: If an employee is disappointed with the outcome — a lack of bonus or raise — address their concerns and how the company might be able to assist in other ways such as financial counseling. 
• Maintain confidentiality: Remind employees that you will not discuss compensation details with others. 

Handling Pay Disparity in Employee Compensation

Some employees will bring up pay disparity in employee compensation conversations — warranted or not. And HR pros will want to be ready to address concerns and issues.

Ideally, you stay ahead of pay disparity concerns and issues. But you’ll likely have to address them in compensation talks. Here are guidelines for being proactive and reactive:

Do a Comprehensive Pay Equity Analysis

To stay ahead of pay disparity discussions:

• Use standardized data to compare salaries across different departments, roles and job levels. 
• Analyze any pay gaps based on protected characteristics such as gender, race, sexual identity or ethnicity. 
• Analyze factors that contribute to disparities such as experience, performance and tenure.

Develop Clear Compensation Guidelines

Again, to be proactive, you’ll want to be sure you have compensation guidelines to look at when hiring, promoting and when pay disparity concerns are brought up. For that:

• Establish defined pay ranges for each job role based on market data, internal equity and performance expectations. 
• Outline the factors used to determine pay adjustments such as performance, skills, responsibilities, and learning and development. Ensure all employees know and understand these factors. 

Communicate with Transparency

Whether employees bring up pay disparity issues in salary talks or not, you want to proactively:

• Explain the rationale behind pay decisions to employees during review discussions.
• Show employees the established pay ranges and supporting materials on your compensation guidelines.
• Consider disclosing salary ranges for different positions within the organization. 

Address Identified Pay Disparities

Now, let’s say an employee brings a fact-based pay disparity to your attention, regardless of whether it’s in a compensation conversation or not. You’ll want to:

• Investigate the disparity to ensure it is addressed, rectified and used as a catalyst to identify other potential disparities.
• Adjust salaries to correct inequities found in the analysis. 
• Prioritize addressing larger pay gaps first. Then address any others found in your analysis.
• Provide training on the company’s compensation philosophy and pay equity guidelines. 

Regularly Monitor, Review Pay Equity

Finally, to avoid pay disparity issues, you’ll want to:

• Conduct periodic pay equity audits to identify and address ongoing issues. This is especially important as roles evolve, hiring increases or decreases or your company shifts priorities. 
• Incorporate feedback from employees regarding perceived pay inequities. 
• When you conduct reviews, make sure all compensation practices comply with relevant equal pay laws and regulations. 
• Watch the market. Regularly assess market salary data to be sure your pay structure is competitive and fair.
• Consistently communicate with employees the steps you take to ensure pay transparency and equity. This can improve morale and engagement.