No Budget for Raises? Start Explaining Pay Decisions

It’s a difficult time for pay. 

Employees want raises. Many of them are being hit with financial stress and inflation that’s rising faster than wages. But many employers, dealing with rising costs amid economic uncertainty, face a reality they can’t easily change: There is only so much money available. 

While many components of compensation can be hard for employers to navigate — namely, competitive pay raises — one thing can be more controlled: talking to employees about pay decisions. 

“Employees want to know how pay decisions are made,” Carrie Cavanaugh, SHRM-SCP, senior HR consultant at HR consulting firm Find Great People, said June 18 at SHRM26, held in person in Orlando and virtually. 

"Transparency builds trust, even when budgets are tight,” she said. “And when there’s no money for pay raises, we have to say that too.” 

Cavanaugh argued that employers often spend significant time gathering market data but fail to develop a clear philosophy for how compensation decisions are made — or explain those decisions to employees. 

“The market position you take is a choice, not an accident,” she said. 

For HR leaders facing ongoing recruiting challenges, retention concerns, and budget constraints, compensation strategy requires more than simply matching market rates, she said. It requires making intentional decisions about pay and ensuring employees understand them. 

Employees want to know several answers about pay from their organization: how pay decisions are made; why people in similar roles may earn differently; what growth looks like over time; and what they can do to increase their earnings over time. 

Organizations should be prepared to answer those questions honestly, Cavanaugh said. Employees may not always like the answer, but they are more likely to trust decisions that are explained clearly and consistently. 

Article: Employees ‘Losing Hope’ on Wages 

Market Data Is Only One Piece of the Story 

Compensation benchmarking remains a critical tool for organizations, Cavanaugh said. But she cautioned HR leaders against relying exclusively on salary surveys when making pay decisions. 

Employers should also consider broader trends, including low unemployment, labor participation rates, falling birth rates, and demographic shifts that could continue to shrink available talent pools in the years ahead. 

“We do not have the people coming to us looking for work that have in the past,” Cavanaugh said. 

Those labor realities make compensation decisions increasingly important, particularly when it comes to retaining current employees. 

At the same time, Cavanaugh stressed that market data should not dictate compensation strategy on its own. Instead, organizations should establish a compensation philosophy that reflects their business goals, workforce needs, and financial realities. 

“What we want in our philosophy is to create a plan where pay reflects skills, impact, and accountability,” she said. 

Organizations do not have unlimited compensation budgets, and not every employee or position requires the same approach. Some roles may warrant higher market positioning because they are more difficult to recruit or retain. Others may require targeted adjustments because they have fallen behind market rates. 

Pay Compression Remains a Major Concern 

One area where compensation strategy often breaks down is pay compression. 

Many organizations have increased starting salaries to attract workers in recent years. But those increases have sometimes outpaced adjustments for existing employees, creating situations in which new hires earn nearly as much — or more — than longtime workers. 

That can create morale and retention challenges, especially when experienced employees are responsible for training newcomers. 

“All we’re doing is incentivizing those people to leave,” Cavanaugh said. 

She encouraged organizations to look beyond external market comparisons and regularly assess internal equity as well. 

Many employers, she said, gather market data, update ranges, and move employees within those ranges without fully evaluating how compensation compares among existing workers. 

As a result, inequities and compression issues can persist for years. “If we’ve got a real compression issue,” Cavanaugh said, organizations need to address it proactively rather than continuing to apply uniform increases that fail to solve the underlying problem. 

Transparency Is More Than Sharing Every Salary 

While pay transparency laws continue expanding in some jurisdictions — a good thing, Cavanaugh said — she emphasized that organizations do not need to publish everyone’s compensation information to build trust. Instead, they should focus on helping employees understand how compensation systems work. 

“Transparency builds trust,” she said. 

That includes explaining the organization’s market position, how salary ranges function, and what factors influence movement through those ranges. 

“The goal is clarity, not overexposure,” Cavanaugh said. 

When employees do not understand compensation decisions, they often create their own explanations. Those assumptions are often inaccurate, but they can still undermine trust and engagement. 

“Silence creates stories,” she said. “[Organizations need to have] a philosophy on pay and a philosophy to share with employees so they understand why they get paid what they get paid.”