‘Every compensation decision must be justifiable by objective criteria. That’s the new North Star for businesses in the pay transparency era.’
If you’ve been reading this newsletter for a while (or even if we’ve crossed paths recently — I do tend to repeat myself…), this idea probably sounds familiar.
Until now, the Compversation has focused squarely on compensation. I launched it specifically to create a space for compensation professionals to connect and prepare for the coming pay transparency revolution.
But here’s the thing… compensation doesn’t exist in a vacuum, cut off from the rest of HR. Our work is both a mirror of broader HR practices, and a driving force for change.
Greater transparency around compensation will only shine more light on HR’s ‘black boxes’, making them increasingly unacceptable to employees and social partners alike.
This is the first of a five-issue miniseries talking about how compensation is spreading beyond comp & ben teams to reshape HR as a whole.
Compensation as a starting point
I had a realisation while listening to the experiences of two of my peers: both compensation and benefits leaders in large businesses with headcounts in the thousands.
Each story began the same way: employee representatives had asked them to justify pay gaps between men and women. While this might be a relatively rare occurrence today, it will soon become standard practice.
That’s because the EU Pay Transparency Directive stipulates that any pay gap of 5% or more between men and women must be investigated by a joint pay assessment conducted in partnership with employee representatives.
(As a reminder, the gender pay gap in the EU is around 12% as of 2023 — so this is an issue that concerns a large number of businesses).
Both companies responded by launching an audit of their pay practices, and both concluded that the compensation process itself was sound. The gender pay gaps they were seeing were a result of one or more of the following common factors:
- Their compensation policy
- The results of their annual performance reviews
- The value of roles held by men and women
Case closed? Not quite.
Employee reps at the first company demanded an audit of the performance review process to ensure it was objective. And those at the second company asked for more detail on the job evaluation methodology used, so they could determine that these criteria were objective too.
Is transparency contagious?
The experiences of these two professionals give us a peek into the very near future for the majority of businesses.
The pay transparency era will shed light not only on compensation itself, but also on the processes and factors that inform pay decisions. Without this, we’d be looking at a purely theoretical, surface-level kind of transparency. And that won’t cut it with employees, social partners, employment tribunals or the wider public.
The key lies in what is becoming my catchphrase: all pay decisions must be justifiable by objective criteria.
But… what exactly are objective criteria?
The same level of rigour must be applied to the HR pillars behind compensation (performance evaluations, job evaluation, etc) as to how they’re factored into pay decisions. Data scientists talk about the concept of ‘trash in, trash out’ to highlight the fact that an algorithm will inevitably produce erroneous results if it’s trained on bad data.
It’s no different with compensation policies.
The idea of transparency spreading beyond compensation might be a frightening concept for employers. But that fact is, change is inevitable: it’s the way the world is moving, and all businesses will eventually be forced to deal with it in response to employee complaints. Those that take action early stand to turn it into a real competitive advantage.
Time to move past old assumptions
I’ve already talked about the importance of a solid compensation policy. It defines the criteria companies take into consideration when determining salaries. However, it doesn’t say whether these criteria are sound.
When we dig into it, we often find that many decisions are still made on the basis of long-held biases or outdated assumptions. In the pay transparency era, this is no longer acceptable.
I know that exploring these issues is a demanding task, but it’s also exciting — it allows us to reexamine some of the most persistent myths in our profession and challenge long-standing ideas and prejudices. That’s why I’m launching this newsletter mini-series on the various criteria that can be used to justify compensation decisions.
We’ll cover:
- Performance reviews
- Employee potential
- Defining and evaluating skills
- Job evaluation
We’ll explore whether there’s room within each of these categories for objectivity — crucial in the age of transparency. What do you think? I’d love to hear your thoughts.
To continue the conversation
Here’s some reading to keep the conversation going. If you’ve come across any interesting reads, feel free to send them my way!
Companies must balance action with transparency to meet public expectations, research finds — Tove Malmqvist, Trellis
Research conducted by Radar in more than 30 countries asked the public about their expectations of large businesses in order to earn their trust. Paying employees equitably ranked second — just after product safety, and ahead of environmental impact.
