- Learn the background of your employees. Having a complete and holistic view of each individual’s skills, experiences and performance can help you better articulate why they’re paid what they’re paid.
- State the awards employees are receiving and inputs affecting pay decisions. Explain the intent of each reward type (for example, merit vs. bonus) and what data points (e.g., stakeholder feedback) affected the allocations that the employee is receiving.
- Advise what employees can do to improve performance. Share with them their strengths and development areas, and ask what support they need.
- Ensure employees understand the rationale for decisions. Answer any questions that employees may have about how their pay was determined.
Your organization’s compensation investments are only as effective as how well they’re understood by employees. This starts with helping ensure that people leaders can speak to the intricacies of compensation throughout the year — in particular, during the annual compensation review process.
While many companies have moved to quarterly goal setting and performance discussions, the year-end compensation review is a unique opportunity to recognize employees for their contributions during the past year. If your company is focused on pay for performance, it’s especially important for managers to be able to link rewards to desired behaviors.
Building a framework for managers to follow when holding pay conversations will be especially beneficial to the organization during annual compensation reviews.
Pay Conversation Framework
1. Gather context on individual employees. Before scheduling meetings with employees, gather as much detail on them as possible, including their skills, experience, pay and job change history and stakeholder feedback. Having a more complete picture of employees ensures you can speak more confidently to them about why they are in one part of the range versus another (if they’re relatively new to role, they would typically be near the lower end of the range).
2. Clearly state compensation decisions and the purpose of each reward. Explain any compensation allocations that the employee is receiving (such as merit increase, market adjustment, promotional increase, bonus, equity) and the intent of each reward. For example, annual bonuses are typically intended to recognize past performance while equity is intended to recognize future potential and help employees feel they have a stake in the company’s long-term success.
3. Share inputs for decisions to connect rewards to performance. Connect compensation decisions to the employee’s performance, (what objectives they were expected to deliver and how they delivered them). Explain how the following inputs affected their allocations:
- Stakeholder feedback on the employee
- Individual employee performance and impact to the company and division
- Employees’ strengths and development areas
- Country-specific guidelines on merit and equity allocations
- Employee contributions relative to role expectations and time in role
- Employee’s position in range and time in role.
4. Focus on what the employee can do to develop in the next quarter and upcoming year, including specific examples. Specify the top three strengths (behavioral and technical) possessed by the employee and share what you observe to be their key areas for improvement. Ask:
- What do you think are your areas for development, and what support do you need to grow?
- What do you see as your strengths and opportunity areas?
- What are your career aspirations, and what can I do to help you get to where you want to be?
5. Check for understanding. Assess whether the employee agreed with their performance review and how they feel about their rewards. Is there any important detail or context they would’ve liked to have captured as part of the performance review? Answer any remaining questions they may have about how their rewards were determined. These may include:
- How is inflation factored in when creating compensation budgets?
- Why am I not being promoted during the cycle?
- Why am I paid below the midpoint of my pay range if I’m a strong performer?
- Why is my pay lower than what’s shown on websites like Glassdoor.com?
- How are the number of restricted stock units calculated?
- How often are compensation ranges reviewed?
Communication Is Critical
How you communicate compensation decisions is just as, if not more, important than the value of the awards you deliver, especially if you aspire to link pay to performance.
With this in mind, make sure to equip your managers with the knowledge and resources they need to communicate pay effectively.
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