Employee Pay. It s much more than a number.

Transcription

1 Employee Pay It s much more than a number.

2 Compensation whether hourly wages or annual salaries is a talent attraction magnet, a general employee motivator, a retention technique and a measure for the health of your business (and the economy as a whole). But there s often confusion around salaries, both in what today s accurate ranges actually are, and if every department within a company truly needs to evaluate compensation. Incorporating a strategic salary program that aligns with business goals requires a comprehensive understanding of the current labor landscape, and the role employee pay plays in every department within your company. This guide will discuss why compensation strategies should be discussed across departments, and how your company can address employee earnings today to help you maintain the right approach tomorrow. Let s get started.

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4 Finance Salary as a revenue driver. Pay as a Talent Attractor Wage increases have been slow despite the healthy economy, and the challenge of balancing operating costs and overhead against revenue weighs heavily within finance departments. However, in a recent survey conducted by Adecco with 575+ executives, 50% of respondents thought the current federal minimum wage rate should be raised. Half of the nation s companies are there because they understand the long-term benefits of higher wages, including improved retention and productivity. It s just a matter of time before the economy reflects that, forcing lagging companies to play catch up. 2

5 To that point, there s a rapidly declining appeal for companies to remain below market average wages. The unemployment rate is the lowest it s been since the prerecession days, and talent is hard to find, to say the least. In a study published by the University of Tennessee regarding the role compensation plays in employee motivation, researchers found that job seekers often reject lowpaying job offers on the basis of pay alone, without even considering other factors. They also found that pay is far more important in a job choice than in a decision to quit. Pay is one of the few company characteristics people can know with certainty before taking a job. Makes sense. Furthermore, according to PayScale s 2017 compensation report, one third of top-performing companies reported changing their compensation strategies to accommodate new hires with new expectations. If you re not able to attract the talent you need, your business s bottom line will take a hit far greater than any savings from below market average pay and your competition will reap the benefits. Now, attracting the talent you need through competitive salary offerings will drive revenue for your company, but what about the employees you already have? Pay as a Retention Technique Adecco recently monitored 40 top clients pay rates against their turnover costs for a 14-month period. What we learned was fascinating: Those that paid within the bottom 25th percentile of market wages saw almost 30% turnover each month. Those that paid in the top 75th percentile? They averaged only 10% turnover each month. And remember, the cost of turnover is substantial. In fact, the average national cost to replace an hourly worker is around $6,000, while the average to replace a salaried employee is the equivalent of 6-9 months of their annual salary. No finance department is OK with those numbers. Retaining your talent will only add to your revenue. The less you have to spend in searching for, interviewing and onboarding new hires, the more you ll save. Talent retention is unstable, and employers are introducing soft offerings such as flexible schedules and work-life balance in hopes of appealing to their workforce beyond monetary offerings, and thus, saving them from increasing wages. The thing is, pay is almost always and will likely always be the most important job factor to an employee. In a study Adecco conducted with over 1,000 Millennials, the largest segment of the workforce, 85% reported pay to be their most important job factor. This stat appears accurate when looking to today s market, which is fostering a mentality that switching jobs means higher pay. In a Glassdoor survey conducted by Harris Poll, 49% of employed adults in the U.S. feel they must switch companies in order to obtain any meaningful change in compensation. That s fuel for jobhopping. If you re in fear of losing employees, or are experiencing high turnover, increasing wages is the best way to retain the talent you have. 3

6 Human Resources Salary as a motivator. The Psychology of Pay Human resource (HR) departments face perhaps the toughest role in a company s compensation plan. Not only do these departments have to devise these plans, they also have to obtain buy-in from higher executives. That s quite a responsibility. Fortunately, in today s talent-scarce market, a surplus of recent research has been conducted to help guide HR departments through consultative compensation conversations. The heart of those conversations? How pay psychologically affects those receiving it. Statistics support the correlation between wage satisfaction and productivity while on the job. According to a study by Future Workplace, 41% of employees list unfair compensation as their reason for feeling burned out. What s more, in the executive management book, Managing Employee Performance & Reward: Concepts, Practices, Strategies, the authors recognize the role that pay has in the company-toemployee relationship as a whole, stating the meaning of compensation systems is far broader than mere economic terms, signaling much about the nature of the employment relationship. To use salaries as a strong basis for employee productivity and healthy relationships, HR departments need to take the psychological aspects of pay a step further and evaluate their workforce. While pay is the largest, underlying employee motivator, how you approach a pay strategy will differ organization to organization depending on the current and future state of your employee base. Paying for Performance vs. Paying for Potential Historically, most HR departments have approached compensation with a pay for performance approach. That is, salaries increase gradually the longer someone works, often at a rate of 2-3% annually. This approach was derived from workplace and behavioral psychologist J. Stacy Adams s Equity Theory. The theory implies that an optimal, happy employee is created by a fair balance between their inputs (work) and outputs (salary). If this balance is off, and an employee feels they re not being compensated properly for their inputs, the employee s behavior, attitude and productivity would also be off. It s a valid, often accurate theory. Pay for performance is still the most widely practiced compensation conversation between employees and their companies. However, a modernized take on compensation has been introduced in recent years that is worth considering: pay for potential. This compensation philosophy aims to account for what each individual brings to the table and how well they use their skill sets on the job, versus rewarding them with bonuses and higher wages once they have completed a task. 4

7 Implementing Pay Changes You have evaluated your current pay strategy, found room for improvement, devised a plan and received buy-in from upper management. How do you set those changes in motion, without disrupting (or upsetting) your workforce? In the same study published by the University of Tennessee regarding the correlation between employee pay and motivation, the authors turn to Behaviors in Organizations to discover how employees respond to changes in pay. In most cases, changes in pay depend heavily on clear communication of the reasons behind the changes. Salaries become even more important to employees and affect their behaviors even more when company changes are made, especially when companies do not communicate a convincing reason for the change. In one study, the book found a 141% increase in theft when a pay cut was made without explanation, compared to only a 54% increase in theft where workers received an adequate explanation and where managers expressed remorse. This same communication practice should also be implemented when employee wages are being raised. Clearly communicating reasons for pay changes even if those changes are positive will not only help manage the expectations of your employees for future pay changes, it will also build a foundation of trust and transparency for the relationship between the employees and organization as a whole. Transparency in pay continues to become a trending and in some cases, critical compensation strategy. In our next section, we will discuss why this is becoming more prevalent, and the laws surrounding it that your company should be aware of. 5

8 Legal Salary as a regulator. Prior Pay As changes in the law continue to shape the job market and the experience of employees, it s important to stay up-to-date with current labor and pay laws, and ensure your team is prepared for changes in regulation. Failing to do so may not only find you in legal hot water, it may also drastically harm your organization s reputation. 6

9 Among these top challenges is wage transparency. Talking about salaries has long been thought of as office taboo, but in today s labor landscape where attraction and retention is difficult, salary transparency is taking off. According to a Forbes interview with Alex Douzet, a Chief Executive Officer at the online job search company The Ladders, the frequency with which workers are switching jobs and thus gaining exposure to various salary offerings is causing wage transparency to become common practice in order to attract job seekers. The days are fading when a salary offer comes further along the interview funnel. Job seekers want to know what you re offering for a position, be that hourly or salaried, before they take the time to go through an interview process. It s hard to blame them. Recent laws are also forcing companies to be more transparent with pay. The Prior Pay Law, which has been enacted in 21 states and is rapidly gaining popularity, makes it illegal to ask interviewees questions about pay history. In New York City, there is up to a $250k fine for any prior pay questions deemed an intentional, malicious violation of the law, or trying to use a candidate s prior pay to benchmark what their pay at your company should be. Beyond using pay transparency as a tactic for attracting job seekers, it could also be seen as a healthy workforce practice. In a recent Glassdoor global study, 70% of today s employees believe salary transparency is good for workplace satisfaction. In contrast, a workforce relationship could be poisoned if an employee were to discover they re being paid what they consider a dishonest salary. If you can t compete with above-average compensation, it pays to start with transparency as a way to build trust within your workforce and attract the hard-tofind talent you need. Equal & Fair Pay Though equal pay provisions, and the correlating EEO reporting required by companies, was recently removed by the current administration, an overwhelming majority of today s top companies are taking matters into their own hands by implementing equal pay audits and evaluations of their own. Laws may be changing, but workforce culture is too. Currently, women still routinely earn less than men for performing the same job functions, and prior salary is often used by companies to determine a new starting salary. This results in the persistent salary gap between men and women, with women earning 80 cents (on average) for every dollar men make. Diversity is key, and companies are taking their own stands on the need for parity and inclusion. With the rapidly spreading Prior Pay laws, and the desperate need for evaluation of equal and fair pay, how can companies ensure compliance and transparency with current laws and cultural standards? We suggest conducting these three action items. 7

10 Compensation action items 1. Conduct a third-party pay analysis to ensure your company is in line with pay and labor laws. Hire a reputable organization to take a close look at employees salaries, years at the company, prior experience, education and training, work duties, job classifications and bonuses. And be prepared to change job titles and pay rates accordingly. 2. Pay close attention to pay complaints. Legal risks such as co-employment claims often start with pay dissatisfaction statements to management, or even the employees coworkers. These statements are fully protected by the National Labor Relations Act and should not be chastised or ignored. Legal teams should work together with management and HR teams to understand why the pay complaint was created, where the employee got their information and if the complaint uncovered a company error that could cause critical harm to the company s reputation or legal standing. 3. Always know the temperature of your workforce s pay satisfaction. Make note of employee attitudes and behaviors, and any loss of productivity by conducting an employee survey. Ensure the questions are straightforward and leave no room for misinterpretation. Once you ve collected the data, leverage a third-party expert to analyze it and help you determine a plan to put your findings into action. 8

11 The top takeaways Compensation in today s job market is much more than a number. It does not have to be confusing. Leverage your salary offerings to attract & retain top talent, motivate your employees and regulate your company s reputation. Salary plays a role at every department within your organization. Staying up-to-date with the latest salaries within your vertical and the latest compensation trends in the labor market at large will give you a leg up on your competition, and help you maintain a strategic approach to wages and pay. What s next? Ensure that your tactics match the climate of the market by meeting with a reputable PEO or staffing agency. This thirdparty perspective will help you to prepare an ideal game plan for your compensation policies, as well as help you continue to maintain your strategy over time. Contact us today to learn more about how you can analyze and potentially revamp your compensation strategy. 9

12 Sources Finance Best-in-Class Workforce Management Insights: Salaried Employee Turnover: University of Tennessee Report: PayScale s 2017 compensation report: What s the real cost of minimum wage? 49% must switch jobs/glassdoor: Human Resources Employee Burn Out: Managing Employees Performance & Reward: books?id=mqkncgaaqbaj&pg=pa45&lpg=pa45&dq=rousseau+%26+ho,+2000&source=bl&ots=p5vml3qgsj&sig=w_ CzbPDNUB04-s6C1oP1QzwgMuA&hl=en&sa=X&ved=0ahUKEwjfyt6lnf_ VAhUKjFQKHe55C6UQ6AEIMjAB#v=onepage&q=Rousseau%20%26%20Ho%2C%202000&f=false Equity Theory: Pay for Performance: Behaviors in Organizations: Legal Salary Transparency: Glassdoor global study (70% pay transparency): adeccousa.com