Are We Moving Toward Democratic Pay?

September 01, 2016

Discrimination has become a metaphor for unfair but most pay systems discriminate. We know gender is a problem and business is figuring out how to eradicate that but will performance soon be added to that agenda as well? Does awarding additional pay to an employee who is more engaged or adept than their peers qualify as unfair?

This may be OK for actors, athletes, and pop stars but what about in the team environment in the office? Companies reward their best performers first and those less able and with fewer options get what is left, in effect taking from one to reward the other. The rationale being that general increases do not encourage performance but reward tenure.

Years of low salary inflation have caused employers to motivate productivity improvements through the discretionary effort that comes from employee engagement which has at its core equity and fairness - the perceived values of millennial employees.

Behavior rewarded is behavior repeated but individual awards are not the only way to motivate behavior. Employers are increasingly focused on team incentives to encourage group behaviors consistent with these new workplace values and to better aid transparency.

Everyone is used to accessing information without having to be secretive or demanding and information about compensation will not be any different. As we strive to create open and trusting workplaces people will want to have a better understanding of what fair pay is for their position and skill set.

Pay transparency is already gaining momentum and heralding a different environment from only a few years ago when pay was confidential and companies were reluctant to publish even ranges. While pay transparency refers to more openness about who gets paid what employers should embrace the opportunity to also talk more about their pay-for-performance philosophy and incentive plans. Any business would benefit from that.

The trend is away from negotiated salaries upon joining a company and creating outlier salaries. When colleagues are perceived to be paid more than their peers the solution is rarely a pay cut for the outlier and usually involves increasing the pay of the disgruntled. "Engaged" employees show less interest in external comparisons and are more concerned with how they fair internally and whether their employer walks the walk on fair pay. Perhaps an employee vote may be the last remaining option to curb executive pay after the abject failure of public opinion, taxation, and relative disclosure?

These mini trends taken together suggest that pay management is responding to the values shaping workplace culture; increased perceived fairness and transparency in pay formulation and distribution while new incentives motivate team rather than individual behavior.

Elliott Jaques first addressed "felt-fair pay" in the Requisite Organization which in 180 pages describes "a total system for effective management" and dedicates only 4 to employee compensation. The inference being that if people feel that they are fairly treated and enjoy their work, pay takes care of itself.Pay today is determined mostly by how an employer perceives an individual's value relative to others of similar worth to the organization i.e. position in range, and a number of other fungible variables (e.g. performance, anticipated contribution, and flight risk). With the range level reflecting the employer's desire to lead, lag, or target market rates.

The compensation supply chain is:

  • The criteria used to value jobs;
  • A position's relative value to that of others;
  • The position of pay ranges compared to the market; and
  • Where an individual's pay is positioned within the range.

Each of these steps is likely to gradually become more transparent as employees seek more comfort that pay is being managed fairly. Compensation management is less precise than people imagine (it is often referred to as an art form masquerading as a science) and the process needs to be able to withstand scrutiny.

Employers involve employees in JE Committees and self assessed performance systems but primarily the foundation is established by the employer. That can continue but in most companies needs to become progressively more transparent and we suspect if engagement is to be maintained it needs to become more responsive to employee input. Perhaps competencies and values will start appearing in JE criteria? Performance assessment notoriously distrusted by employees, will perhaps start to incorporate 360 degree input on the contribution of individuals to the team effort?

The importance of the external market and compensation surveys will diminish as internal comparators become more important. Pay ranges will narrow as differences in base pay start to erode and away from so called "best practice" forcing line managers to take responsibility for pay and team engagement.

Whether these predictions unfold as suggested and at what speed will be a function of how comfortable employees continue to be about their pay. Employers will need to start improving the rigor of internal equity and avoiding any appearance of unfounded discrimination. 

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