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The ABCs, Ds and Es of Tough Compensation Conversations


There’s no doubt about it — talking about pay can be uncomfortable.

Many managers dread the thought of having to communicate pay decisions to employees, particularly when they are difficult or complicated. This anxiety can lead managers to provide insufficient explanations, shift the blame on to others, or worst of all, avoid conversations entirely, inevitably adding to employees’ confusion and frustration.

Having challenging conversations with employees is part of being a good manager. That’s why it is so alarming to see 91% of surveyed employees said “communicating well” is a critical skill their leaders lack, and nearly 70% of surveyed managers admitted they are uncomfortable communicating with employees in general. Research suggests the majority (73%) of business leaders also lack confidence in their managers’ abilities to have difficult pay conversations with employees.

Fortunately, there are several techniques managers can use to make difficult compensation conversations easier and less likely to hurt employees’ motivation and perceptions of fairness. Many of these techniques come from research exploring the communication skills of medical practitioners. Physicians must deliver emotional information to patients in a manner that is sensitive and empathetic, yet still direct, clear and effective. Research suggests that the following ABCDE technique greatly improves individuals’ ability to effectively break the bad news. The same steps can be applied to help managers navigate tough compensation conversations:

Advance preparation. This stage is about preparing for the conversation. Managers should prepare not only what they are going to say and practice how they are going to say it, but also assess what the employee already knows, believes and understands related to compensation. For example, does the employee believe he or she is a high performer and assume a bonus on the way? Does the employee have up-to-date knowledge on the organization’s compensation philosophy and decision-making process? Considering these sorts of questions beforehand helps managers prepare for the reactions and questions employees are likely to have.

Build a sense of trust in advance. Talking with employees about compensation is a lot easier if mangers are already comfortable talking with employees in general. Building a trusting relationship with employees before the compensation review cycle can mitigate the awkwardness of difficult pay conversations and reduce the risk of employees feeling personally attacked by compensation decisions or becoming demotivated. There are also things managers can do at the time of conversations to encourage a sense of trust. For example, arranging a private place to have the discussion face-to-face (if appropriate) and without interruptions, setting aside sufficient time for the conversation, and ensuring employees have the opportunity to ask any questions/express any concerns they may have.

Communicate well. Managers may feel awkward or uncomfortable going into a conversation about compensation with employees. This can lead managers to approach pay conversations too cautiously, beating around the bush and potentially confuse employees rather than being direct and providing an effective explanation of pay decisions. Research has shown that communicators are most effective when they avoid jargon and get right to the point. Managers might also ask employees to repeat their understanding of the pay decision to avoid potential confusion or misconception.

Deal with reactions. Effective compensation conversations do not end with managers communicating decisions and walking away. Managers must also appropriately deal with employees’ reactions to those decisions. These reactions might be cognitive (e.g., denial, blame, acceptance) or affective (e.g., ager/rage, anxiety, hopelessness, shame) in nature and may differ greatly between employees. In any case, managers should be prepared for some reaction or emotional response and engage in active listening during this stage, being sure not to dismiss employees’ feelings as overreactive. 

Encourage and validate emotions. This final stage is about reflection and closure. Managers should identify and correct any distortions employees may have and discuss what the decision means for the employee and that worker’s future in the organization. For high-performing employees whose pay outcome was limited by company budget, this discussion might involve expressing appreciation for their contributions and communicating the ways the company values employees outside of salary increases and bonuses (i.e., benefits, flexibility, etc.). For employees whose performance did not merit their desired pay outcome, this discussion should involve future-focused recommendations and an assurance that employees can achieve different outcomes in the future.

Talking about pay may be uncomfortable, but it is also unavoidable. Managers who fail to effectively communicate pay decisions risk contributing to employees’ confusion, frustration and demotivation. But with appropriate training and the use of research-supported strategies such as the ABCDE technique, managers can become better, more confident communicators and master the art of tough compensation conversations.

About the Author

Lauren Bidwell, Ph.D., is a research scientist at SAP SuccessFactors.

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