Many expected this first year of the CEO pay ratio disclosures to result in more drama. Thankfully for most companies, shareholder and employee reactions were minimal despite the media doing its thing — trying to spotlight the chasm between CEO compensation and the rest of the workforce. Furthermore, while there was speculation that the big story wouldn’t be about the CEO’s pay but about the median employee’s salary and how a person would compare his or her own pay to that of the median employee, that does not seem to have materialized … at least not yet. At the end of the day, CEO pay has long been a hot-button issue; people know it’s generally high and more than their own take-home.
Regardless of the cricket chirps heard during this first year of the pay ratio, it would be irresponsible for us as HR professionals to ignore the current groundswell of public debate on pay. Concern about income inequality, the widening gap between the highest and lowest paid, the shrinking middle class, minimum and “living” wages, health-care costs, and gender pay parity all are filling airtime. The broad social, political and economic awareness of, and discussion about, pay must continue to be a driving force for management and boards that want to keep their employees — executives and broad-based employees alike — engaged, focused and productive in their work. The alternative may well be misguided thoughts of unfair compensation policies and practices and unnecessary distraction.
In the past few years, Pearl Meyer has conducted numerous surveys of HR leaders, management teams and boards to gain insights on compensation communications practices. This past summer, we ran a new survey to understand how the CEO pay ratio and other hot-button issues such as gender pay equity may be influencing pay discussions, as well as to look at the degree to which companies are proactively communicating about some of these emerging pay topics. We also looked back at some of our prior surveys to see where things may have changed as the demand for pay transparency has increased. Here are four key points we learned and what they mean for compensation communication.
We should be doing more to improve the quality of materials shared with all employees to help ensure that people better understand their company's compensation philosophy.
1. Compensation knowledge is lacking. Historically, most companies have not been very good at helping employees understand the basics around how their pay is determined. But given today’s emotionally charged backdrop, employees need to be grounded in how base salaries are set internally and externally. Only then can we have realistic conversations about internal pay equity, merit increases, promotional bumps and/ or other salary issues. With an education about how external market data play a role, we can talk candidly about competitive pay, which can minimize the risk of employees improperly comparing their own pay to those of their colleagues or industry peers.
However, Pearl Meyer’s most recent survey overwhelmingly showed that most companies today (about 80%) do not think their employees have an understanding of how to appropriately compare their own pay to those of their colleagues or to those in similar positions at other organizations. Perhaps it’s because companies are still not transparent enough about how base salaries are determined. More than half of those surveyed said there is no information shared internally about base salary ranges and just 20% indicated employees know the base salary range for their own job grade. Furthermore, less than 5% of companies would say that their employees have an excellent understanding of how their own compensation is determined.
2. Quality and understanding still go hand-in-hand. When we look back at past surveys, we found links between the quality of communications and understanding of compensation programs. Not surprisingly, the higher the company rated the quality of its materials, the higher the perception that employees understood the programs. Our current survey tells us the same thing and further validates the position that we should be doing more to improve the quality of materials shared with all employees — managers, broad-based employees and executives — to help ensure that people better understand their company’s compensation philosophy.
The fact that more than half of the companies surveyed reported that a large portion of their populations have a subpar understanding of how their compensation is determined is a problem. Without this core knowledge, there is ample opportunity for misinterpretations and emotional reactions to take root.
A company’s compensation philosophy is the foundation of its entire program and covers the most basic, yet extremely important elements of a compensation structure: competitive pay positioning (benchmarking), pay mix (total direct compensation components), governance (pay policies and administration) and pay for performance (incentive pay, shareholder alignment). Everyone should understand all these elements and how they work together to create competitive, valuable and fair compensation arrangements for each individual at your company.
3. Managers continue to struggle. It’s no surprise that the cascade of messages about compensation from management through the rank and file continues to be a challenge for most companies. Even though more than half of respondents said that managers are trained to have formal discussions with their direct reports, less than a third said managers do a good job in communicating pay decisions. Why is that? Are the conversations filled with tough messages? Is the quality of the training suffering due to competing priorities? Are managers confident enough to have the discussions?
Although managers are usually on the front line of pay conversations, HR can facilitate improved communications by helping them understand the myriad inputs affecting employee perceptions of and feelings about pay and the methodology behind how base salaries are determined over the course of an employee’s career (from hire to merit adjustments to promotions). Take the opportunity to arm your best and brightest with the knowledge, background and materials they need to talk clearly and confidently about pay.
4. Companies are proactive — but only when they need to be. The CEO pay ratio hasn’t spurred the chaos we predicted (see Figure 1), and the survey shows most companies aren’t using it as the springboard to change the nature of their communications, although a few proactive companies reported using the pay ratio results as an opportunity to make changes to communications materials.
Gender pay equity seems to be a different story and survey responses show it is keeping companies on their toes. (See Figure 2.) More often, companies are having active discussions about how to address this issue because they are getting or anticipating questions. The survey shows that of those already fielding questions, 78% are drafting responses. Gender pay equity has quickly supplanted pay ratio as the current driving force behind developing communications strategies and materials to address compensation concerns.
It is encouraging to see some companies taking the time to prepare for specific issues that could cause employees to think twice about how they are being compensated and whether what they earn is fair. This kind of proactive communication also helps address the evergreen issue of employee trust. In the long run, however, an issue-by-issue approach, versus a comprehensive strategy built on a guiding principle that reinforces the basics of pay, may not be the best or most efficient way to get a handle on our collective pay anxiety. The fact is, too few companies are doing either.
What Can Companies Do Now?
A simple SWOT analysis with your HR communication and compensation teams is an excellent starting point. (See Figure 3.) Plot your strengths, weaknesses, opportunities and threats (SWOT) to see where you can course correct on your compensation communications strategy.
For example, maybe you have a strong compensation philosophy (strength) but haven’t done a good job at communicating it broadly (weakness). The public discussion on pay offers a great reason to discuss how to get out the right messages (opportunity), but you need to be mindful of competing or even opposing messages in the public domain (threat). Or, maybe you have highly talented managers (strength) but understanding compensation has never been a priority (weakness). New or updated training materials can highlight program benefits versus peers (opportunity) but be mindful of areas where the current programs may be below market (threat). You get the idea.
Just because employees aren’t yet asking questions about their pay as a result of this first year of pay ratio disclosures — or the pay story of the week — doesn’t mean they aren’t thinking about them. If the pay ratio wasn’t a spark, some of these other emerging issues may initiate some very tough discussions. In our current environment, it is more important than ever to keep compensation at the forefront of your ongoing HR communications strategy. Let’s all be ready.