How to Counter Employee Perceptions of Income Inequality

The time you spend developing fair policies isn’t worth a thing if employees believe that they’re being undercompensated.

By Stephen Miller, CEBS May 1, 2016
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5Miller.jpg 0516cover.jpg“Most conversations employees have with one another … are about how incredibly unhappy everyone is and how tired they are of being underpaid and unappreciated.”

That’s a comment posted by an anonymous employee on Glassdoor, the employer rating website. Though the remark was about the commenter’s own workplace, it’s a common sentiment across organizations. In a 2015 survey, Mercer found that salary is the reward element most highly valued by workers but that only 55 percent are satisfied with what they earn.

While HR compensation managers can devote many hours to fine-tuning job descriptions, pay bands and career ladders, none of that matters if employees believe that they are being paid less than they deserve. When that happens, many simply leave, triggering a potentially costly and lengthy process to find replacements.

And if these workers stay, even worse problems can result, including “a loss in engagement, a drop in satisfaction and toxic conversations that disrupt other people in the organization,” says Rusty Lindquist, vice president for strategic HR insights at software provider BambooHR in Lindon, Utah.

Both scenarios can be disastrous and costly. “Payroll is by far a company’s biggest expense, so the cost of getting it wrong is tremendous,” Lindquist says.

That’s why creating structures that fairly reward talent and performance is crucial. But just as important, if not more so, is communicating effectively with employees who are being paid in accordance with a well-thought-out compensation philosophy but who believe they’re getting shortchanged. They may perceive the inequality to be in relation to their industry peers, colleagues or managers—not to mention the moneybags in the C-suite who are raking it in.

A Conversation Catalyst

In August 2015, the U.S. Securities and Exchange Commission issued a rule requiring U.S.-based publicly traded companies to disclose how median employee pay compares with CEO compensation—commonly known as the CEO pay ratio. Employers will have to reveal this data for their first fiscal year beginning on or after Jan. 1, 2017. After that, they must identify the median worker wage once every three years—or more frequently if there is a significant change in their workforce or pay arrangements.

That’s likely to spur resentment. “The CEO pay ratio is going to be a huge undertaking for companies” in terms of compiling the data and then justifying it, both to employees and shareholders, says Steve Seelig, executive compensation counsel at HR consultancy Willis Towers Watson in Arlington, Va.

Indeed, CEO compensation is already a sensitive issue with workers, given headlines in recent years pointing out the widening gap between executive pay and that of the rank and file. According to the Economic Policy Institute, the CEOs of top American firms now earn more than 300 times the salary of a typical worker. CEOs at the largest U.S. companies each made, on average, $16.4 million in 2014. And while wage growth remains stagnant overall—rising only 10.9 percent from 1978 to 2014 for a typical worker—compensation for these fortunate few at the top rose 997 percent over the same time period.

“Disclosing CEO pay is not a new topic; publicly traded companies already have to make the information available in their proxy statements for the top five corporate positions,” explains Eileen Adler, chief HR officer at PeopleFluent, a business software provider based near Boston. “People have become nervous about this because, for the first time, the CEO pay ratio makes it personal.”

That might force some companies to rethink how they compensate their workforce. And the pay ratio disclosure, at least at public companies, could be a good starting point for larger conversations. “Companies have some work to do. They need to make the case to their employees that they’re paid fairly,” Seelig says. People will be far more engaged and less likely to want to leave if they believe that pay at their organization—for them and executives—is based on the value they create, a 2015 Towers Watson survey revealed.

Appropriate Pay

Because salary increase budgets have been very modest over the past few years—around 3 percent—setting base salary ranges appropriately and adjusting them as needed can be vital to ensuring that people view their compensation as fair.

“Pervasive feelings of dissatisfaction with pay may be traceable to a number of root causes, but failing to attribute the right market values to jobs and to correctly portray their place in the organizational hierarchy is at the top of the list,” says Michael O’Malley, senior vice president and human capital consultant for Sibson Consulting in New York City.

That said, using market pricing to define salary ranges is subject to error, just like any other method of setting pay. “The market does not necessarily align with the internal value of jobs to the organization,” O’Malley says. That means an employee’s relative importance to a business might not be properly reflected in the individual’s salary. “The point is not that market pricing is a bad approach, but that it is not a panacea.”

And what about raises? “The goal of the annual merit increase is to keep people within market range on their base pay,” Adler says. In other words, yearly adjustments aren’t necessarily intended to be a method of rewarding people for their performance. “If a company is still in the mindset that they’re using annual merit increases to reward and engage employees, then they’re already behind the eight ball, because how much can you differentiate with just a 2.5 to 3 percent pay increase budget? It just doesn’t work; there’s not enough.”

Instead, organizations should focus on what they can do to counter workers’ perceptions of being underpaid. “We may not be able to ensure that all employees, 100 percent of the time, will feel compensated for their value. But we can work hard … to make sure that our pay structure remains competitive and communicate that aggressively within the organization,” says Jeff Lindeman, SHRM-SCP, senior director for talent and engagement at the San Diego International Airport, an independently managed public agency.

Each year, the airport’s HR department reviews the compensation of one-third of its positions relative to national and local markets. Its board has authorized management to benchmark pay to the 50th percentile of the broad market, and “we benchmark against the midpoint of our salary bands, which enables us to attract a wide array of talent, as a band might span well above and below the market rate,” Lindeman says. HR then conveys the results of the annual market reviews to all departments. “That transparency helps managers to answer the question of ‘Are we competitive?’ And that, in turn, helps to resolve employee perceptions that setting pay levels is kind of like the ‘Wheel of Fortune,’ where, behind closed doors, people are spinning a wheel and I either get good money or I don’t get good money.”

Without good information, “people will make up what they believe to be true,” Lindeman says. “We should be listening to our employees, responding to their concerns and helping them see how their pay fits into the overall compensation structure.”

The airport’s HR team, in tandem with department managers, even takes salary reviews a step further. The team and managers look “individually at people’s jobs and if the work they do, based on their proficiency and skill level, is at a higher level [than their designated pay grade], we’re willing to consider re-evaluating that position and moving it to a higher pay band.”

The result of these efforts? Lindeman says his organization has “a highly stable, highly engaged workforce,” with employee engagement levels that hover around 80 percent. But he emphasizes the importance of “being willing to listen when someone says, ‘Hey, the work that I’m doing is much bigger than the job description I got hired for.’ ”

Performance-Based Rewards

Aside from salaries, variable pay—short-term incentives such as annual (or even quarterly) bonuses, for example, and long-term incentives including restricted stock grants at public companies—are often part of HR’s rewards arsenal. But those types of rewards can be mystifying to workers.

“If you’re going to reward performance with an annual bonus, it needs to be directly tied to the organization’s success and what individuals and teams have contributed to accomplish the organization’s priorities,” Adler says. “It’s not just about activity—as in ‘Wow, you worked really hard.’ It’s got to be focused on what the company has achieved and how workers contributed to that effort.”

The San Diego airport implemented a gainsharing plan to “help start sharing the collective success of our organization,” according to Lindeman. “It’s called our Business Performance Incentive, and we take 10 percent of any gain over and above our fiscal year net income plan and distribute it to employees, and all employees get the same dollar amount. It’s created a collective consciousness around how we work and how we get rewarded,” he says.

As a public agency with highly transparent compensation information, the organization finds that a flat-dollar, equal-bonus-for-all strategy works best, but many private businesses increasingly differentiate variable pay based on individual performance. “Today’s new pay reality for employees is one where guaranteed pay growth is out, but companies remain quite willing to pay for performance—even more so if those individuals can drive business innovation,” explains Tom McMullen, vice president in Hay Group’s reward solutions consulting practice in Chicago. “Whereas many organizations in the past had short- and long-term incentive programs that were team-based, creating a rising-tide-lifts-all-boats situation, many of these programs are now being adjusted to include individual performance modifiers to better reflect each employee’s direct contributions.”

But the ideal of performance-based bonuses is often unfulfilled in practice. In 2015, Towers Watson found that 30 percent of U.S. companies planned to give bonuses to workers who failed to meet performance expectations. That matters because companies are likely to have difficulty holding on to high-performers who see too little of a distinction between the incentive they received and what was given to their poorer-performing colleagues. As a result, many organizations face the challenge of differentiating variable pay enough to motivate and recognize top performers while ensuring that everyone knows what they need to achieve in order to reap equivalent rewards.

Yet, when creating performance metrics related to compensation, at many organizations the formulas for meeting target goals can get overly complex. “If you have an incentive program that is so complicated that people can’t understand it, then you’re not going to motivate them,” Adler says.

Her company, PeopleFluent, sets its priorities at the beginning of the year so everyone clearly understands the direction the organization is taking. “Those priorities probably won’t change during the year, but what an employee needs to do is going to be changing constantly,” she says.

To that end, the company believes in making “real-time” personal goals. Adler defines that as “setting and resetting goals every 30, 60 or 90 days and constantly evaluating where you are with them. Instead of just a midyear check-in and an end-of-year check-in, it’s fluid and happening all the time.”

The San Diego airport takes a similar approach. “Philosophically, we’re moving away from a rearview mirror perspective on performance to a prospective outlook,” Lindeman says. “Our quarterly conversations to talk about progress toward goals now are more about what’s upcoming and what can we do to really excel in delivering in the upcoming quarter, as opposed to at the end of a quarter sitting down and looking backward and saying, ‘Well, here’s what I see you did during the last quarter’ and then checking a box.”

The Value Proposition

It might help to encourage people to view their rewards as being in different buckets. “There’s base pay, which is what most people spend their time thinking about and negotiating. But the real dollars can be in special incentives, bonuses, career development and promotions. And that’s what HR should get people to focus on,” Adler says.

This means that conversations around career advancement and professional development are essential, as employees want to know what opportunities exist—and how they can earn more money.

“Employers are finding ways to deliver pay increases through other means like promotions, which reflects the growing trend of focusing on careers and sustained performance, not a one-year snapshot and reward,” says Mary Ann Sardone, an Atlanta-based partner in Mercer’s talent practice.

Beyond Base Pay

To help employees better understand their compensation packages, encourage them to look beyond base pay and consider the following:

  • Does the company have a bonus structure or profit-sharing plan, and, if so, how large a component of total compensation does it represent?
  • What, if anything, is the match on 401(k) or other retirement savings plan contributions?
  • What about contributions to health savings accounts?
  • Are there other pieces of the rewards package that are monetary in nature?

In 2015, a promotion brought an average rise in remuneration of about 8 percent, Mercer found. In addition, 41 percent of U.S. organizations last year budgeted promotional increases separately from merit increases, up from 36 percent the previous year. That reflects the growing focus on getting promoted in order to get a substantial boost in pay.

Providing a career framework—a personal development map that shows workers how they can progress upward within the organization—helps at review time when people ask about a raise. “This allows managers to respond, ‘Great, I understand that you want to move forward in this organization and earn more money; here’s what you need to do,’ and then sketch out a career path that will motivate the employee,” says Mykkah Herner, head of professional services at Seattle-based PayScale, a compensation software company.

Get Managers On Board

To be sure, managers have a key role to play. “Give managers enough information to not be dangerous, but to be informed and helpful—and also give them the tools and resources they need to carry out your intentions with regard to communicating about compensation,” Herner says. There’s an added benefit to this approach, he notes: “Training managers in the what, when, how and why of compensation is an opportunity for HR to step into a trusted advisor role and gain authority.”

What Herner calls the “worst scenario” is when managers pass the buck, telling direct reports “I can’t give you a bigger increase; HR won’t let me.” When that happens—and it frequently does—it undercuts all of HR’s efforts to build confidence in the fairness of the pay system.

A far more effective approach is to show employees how they are paid at market rates (if that’s the organization’s philosophy), how their value is determined internally and how the company rewards performance (bonuses tied to achieving goals, for instance). Managers should be trained to give those answers—or encouraged to bring HR in to provide them.

Lend an Ear

The clarity of the message is crucial. Workers need to know what’s expected of them, how well they’re doing—and where they need to do better—and how that relates to performance-based pay and bonuses. “It comes down to open, transparent, honest communication,” Adler says.

“Sometimes, simply having a serious discussion [about pay] can make the difference between an employee feeling valued or not,” Lindquist of BambooHR adds. “Compensation is the communication of how much we value that employee. So if they feel undercompensated, they’re feeling undervalued. This is deeply emotional. If you take it seriously, then you’re telling them that you are serious about their value and you care about how they perceive that value.”

HR professionals “need to know that these conversations can happen at any time, they need to be prepared for them and they need not to be offended when they do happen,” Lindeman says. “Generally speaking, the more you are willing to explain your actions rather than just requiring employees to be satisfied or leave, the more you begin to build a culture of trust and respect.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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