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Pay Fairness Perception Beats Higher Pay for Improving Employee Engagement

Employees want to know how their compensation is set

A person is holding a stack of money in front of a laptop.

A fair and transparent pay process boosts employee engagement even more than providing additional pay does, new research reveals.

"Just by having an open dialogue about the pay process and employees' contributions at the company, employers can ultimately drive better outcomes for their businesses," said Lydia Frank, vice president of content strategy at PayScale. The Seattle-based cloud compensation data and software firm recently surveyed more than 500,000 employees for its employee experience study.

"Being transparent about pay doesn't necessarily mean revealing what all employees at the company make," said Chris Martin, lead data analyst at PayScale. "Employees need to understand the process through which their salary range is determined and to believe that process is fair."

Among key findings from the firm's Nov. 7 survey report, The Formula for a Winning Company Culture, were the following:

  • Employee satisfaction is driven mostly by feeling that pay is fair, not by how much someone is actually paid. How employees feel about the organization's pay philosophy and process is more likely to affect their outlook than their actual pay.
  • Employees don't know whether they're paid fairly. Of the respondents who felt they were paid below the market rate for their position, nearly 90 percent were actually paid at or above the market rate. Only 11 percent of people who felt they were underpaid were correct.
  • Paying fairly matters a lot. Research shows that 75 percent of respondents who think they were paid at or above the market rate said they were satisfied with their jobs, compared to only 59 percent of workers who felt they were paid below the market rate.
  • Employees want to stay at a rising company. Believing that the company's future outlook is bright was the most important driver for reducing turnover, while feeling appreciated was second most important.

17-1485 Pay Fairness2r.jpgWhen asked how they viewed the compensation process at their organization, most employees expressed doubts about whether pay was fair and transparent.

17-1485 Pay Fairness3q.jpg

Source: PayScale survey of 501,796 workers.

Open and Honest Conversations

"Sometimes, simply having a serious discussion [about pay] can make the difference between an employee feeling valued or not," said Rusty Lindquist, vice president for strategic HR insights at software provider BambooHR in Lindon, Utah.

"Compensation is the communication of how much we value that employee. So if they feel undercompensated, they're feeling undervalued," he added. "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."

"If employers don't bring pay out of the shadows, employees will," Martin warned. "Employees are more comfortable talking about pay than ever before, and they have access to online resources that allow them to price their specific position."

[SHRM members-only guide: How to Determine Turnover Rate]

Given the availability of this information, "you can't pay low and expect employees not to find out," Martin noted. "When they do, you need to have an answer ready—even better if you communicate the compensation strategy before they find out."

However, "your pay process has to make sense before you can communicate it to your employees," Martin pointed out. HR managers "are better off starting this conversation than burying their heads in the sand until employees start leaving to find an employer with a pay process that makes sense."

This doesn't necessarily mean paying at or above the position's market rate, he noted, "but being able to explain how salary ranges are set and how an employee's pay within that range is determined."

Related SHRM Article:

How to Counter Employee Perceptions of Income Inequality, HR Magazine, May 2016

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