The annual compensation review is a critical time of year for employers and employees alike. But how much do your team know about what that process actually looks like? Keep reading to learn how transparency around the compensation review process can be beneficial to both you and your employees.
What is a compensation review?
A compensation review is a structured evaluation of an organisation’s salary structures, bonus systems and benefits packages, as well as individual salaries. They’re usually conducted on a regular schedule, either once or twice a year.
The goal of running regular compensation reviews is to maintain internal equity and external competitiveness, while also ensuring alignment with the company’s compensation philosophy and strategic objectives. Ultimately, this helps businesses to attract new talent and motivate and retain existing teams through fair, effective and competitive compensation.
Defining pay transparency for your organisation
Historically, employers have usually treated compensation as private and confidential. And the idea of disclosing information about pay structures and processes makes many business leaders nervous.
However, it’s important to remember that pay transparency isn’t an all-or-nothing situation. The best way to think of it is as a spectrum, with total secrecy at one end and complete transparency at the other. Most companies land somewhere in the middle.
That means that pay transparency doesn’t (necessarily) mean making all of your employees’ salaries public knowledge. Depending on the level you decide is right for your organisation, it might mean:
- Providing each employee with information on their own salary band
- Providing employees with information on their salary band and the one above
- Sharing your entire salary band structure with everyone (but still not disclosing individual salaries)
Opening up about your compensation review process is another form of pay transparency. It involves providing clarity on the steps your compensation review process entails, who is involved and what factors are considered when making decisions about pay.
How pay transparency can enhance your compensation reviews
At Figures, we believe that the compensation review is one of the most important moments in the year for an organisation. We also believe that transparency is key to fair and effective compensation. Here are some of the advantages of bringing the two together.
Improves perceptions of fairness
The most obvious benefit of transparency in the compensation review process is that it helps employees to better understand the factors that go into determining their compensation. This shows them that their pay has been set via a fair and consistent process, which increases trust in the organisation. According to a 2022 Gartner survey, educating employees about their pay results in a 10% increase in organisational trust and increases perceptions of equity by 11%.
Motivates employees and drives performance
A thorough understanding of pay principles can also be a powerful motivator for employees since it means they know what they need to do to move up the ladder. For example, if employees know that performance ratings are a determining factor in pay increases, they’re more likely to work with their managers to achieve the best result possible. Over time, this can increase productivity and performance across the entire organisation.
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Makes compensation discussions easier for managers
In most organisations, managers are responsible for delivering the results of each compensation review to their teams. And these conversations are a lot smoother for both parties if employees already understand the parameters of the review process. This way, employees won’t be confused or surprised about the factors that have gone into any decision, and can simply focus on the result.
Adds context and nuance to bad news
Delivering bad news after a compensation review is no picnic for managers — and it’s even worse for employees. But, while transparency can’t change the outcome of a decision, it can help employees to understand it. According to research, communicating clearly about compensation is even more important than actual salaries for employee engagement and retention. Understanding the context behind important pay decisions could be crucial for morale.
Sets expectations for the future
Let’s imagine an employee who is due a significant raise because they’re moving from one salary band to another. If they don’t fully understand the reasoning behind the increase, they may expect the same thing to happen in the next cycle — and end up disappointed when it doesn’t. Transparency around the factors that go into compensation decisions can help you manage employee expectations for the future and avoid setting your team up for disappointment.
Prevents unnecessary stress
Compensation is a sensitive and sometimes emotive topic for employees. And the compensation review process can be especially stressful — particularly when they’re left in the dark. Understanding the when, where, and how of the process ensures employees know what to expect. Plus, an important part of pay transparency is equipping managers to answer questions about compensation. Having this information available can relieve stress on employees, helping to build a culture of trust.
Facilitates improvement through employee feedback
Being transparent about your compensation review process allows you to seek feedback from the people most impacted by it: your employees. This allows you to see things from a different perspective and can help you to optimise your process. Plus, asking for feedback tells employees that you value their views and opinions — potentially boosting morale and engagement.
Compensation reviews in the context of upcoming legislation
The EU pay transparency directive is set to go into effect across Europe by 2026. Under the new rules, employees will be able to request information about their compensation and the criteria used to determine it. While this isn’t anything to worry about as long as your pay structure is fair and unbiased, employers will still need to be ready to justify their decisions. And introducing some level of transparency into your pay criteria and processes now could help you to prepare.
It’s also important to realise that the directive isn’t happening in a vacuum. It’s part of a wider trend of pay transparency legislation and a general appetite for transparency from employees around the world. Being transparent about your compensation review process demonstrates your commitment to fairness and equity. This will be key to attracting and retaining talent in the pay transparency era.
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The importance of a structured review process
Pay transparency can bring a lot of benefits to your organisation — but only if your compensation is backed up by strong, consistent processes.
Our compensation review module can help you streamline your review process, ensuring your policies are applied fairly and consistently and providing a digital paper trail of every decision and justification. This both builds accountability into your process and sets your company in good stead for future pay transparency legislation.
Want to learn more about our solution? Sign up for a demo to get started.
