Fair pay does not have to be equal pay

When it comes to pay, fair does not necessarily mean equal. And recent research from my organisation, PayScale, shows that companies with performance-focused compensation may see better returns than those with equal pay.

According to a compensation survey of 7,600 employers in the United States, the number of companies that offer bonuses or other forms of pay for performance has increased 6 per cent over the last two years. Highly successful companies – leaders in their markets that have surpassed revenue expectations – are the most likely to adopt this policy.

In the US, at one end of the pay spectrum is the tired, uninspired 3 per cent cost-of- living adjustment that many organisations give across the board. Companies that do this tell their high performers that their efforts were not recognised and their low performers that it’s okay to deliver mediocre results.

At the other end are companies such as Hilcorp, which gave every employee a $100,000 bonus.

Another novelty practice occurred last year when the chief executive of Gravity Payments cut his pay to set the base pay for his employees at $70,000. However, some employees left the company soon after the change was introduced, upset that less skilled employees got the largest wage boost.

The common problem with these strategies is that they don’t recognise individual contribution. Retaining top employees is a good reason to adopt a pay-for-performance practice, especially when you consider several factors. First, there’s increasing competition for talent in some sectors. Second, millennials have greater expectations for pay transparency and want to feel good about their “deal”. Finally, most executives and managers lack the tools to apply compensation practices that motivate and, ultimately, drive better business performance.

If you’re thinking about changing pay models, here are some considerations:

Eliminate broad pay policies: blanket compensation adjustments or payments do not increase retention in the long run. As with Gravity Payments, they may demoralise your best people who think their efforts are not recognised.

Start with market rate: begin with a data-informed baseline of what each employee is worth in the current talent market. This should take into account factors such as experience, education, job responsibilities and skills and certifications.

Identify whom you cannot live without: speak to managers to determine who is driving business outcomes. Be sure these recommendations are based on the employees’ tangible business impact. Once you have identified these key players, think about the pay differential you might consider to ensure they think their contribution is valued.

Establish performance metrics: decide what you want to reward. Align this with your company goals and culture, and create tangible metrics, particularly for the most important positions. Next, create a bonus structure based on these metrics.

Train managers: our research shows that how people feel about their salary matters as much as the pay itself. You should talk to your employees about how their pay or bonus was calculated, and explain when they are paid above market value. Companies must also train managers to eliminate bias to ensure they are always fair.

Fairness means paying employees the same amount for comparable experience, skills, training and other job requirements. However, fairness can also incorporate unequal pay based on performance and impact to the bottom line. – Copyright Harvard Business Review

Tim Low is the marketing vice president at PayScale