Transparency in Pay

Thanks to John White, JD White & Associates, Inc. for his insights about compensation.

If there is one complaint I hear constantly from employees, it is that they do not understand their organization’s compensation structure. And when employees do not understand why certain decisions are made, they tend to think the worst. Lack of transparency creates a vacuum that is often filled with confusion, suspicion, and resentment. Employees will say to me:

· “I have no idea why I am slotted in a certain grade in the salary structure.”

· “The company never explains how the compensation structure is created—it makes me feel like they are hiding something.”

· “I do not know what I need to do to advance in the organization—maybe I need to leave and find better opportunities elsewhere.”

· “I make the same salary as another person in the organization, but I have been here longer and I have a more responsible job.”

Compensation policies need structure, objectivity, fairness and transparency. Without these things, you are headed for poor morale, low productivity, and turnover--the things that can make a major dent in your bottom-line.

There are two methods used to try to create an objective and fair compensation structure: internal job evaluation and external market analysis. An internal job evaluation approach assigns point totals to each job based on a number of factors. Such factors might include the education required for the job, whether the job has supervisory responsibilities, the time required to become proficient in the job, and so forth. Jobs with similar point scores are slotted in the same grade in the job and salary hierarchy.

External market analysis is achieved by using marketplace compensation surveys to determine what similar organizations pay their employees for performing equivalent work. Jobs with a similar “marketplace value” are slotted in the same grade in the job and salary hierarchy.

Is one of these better than another? Yes. Marketplace analysis gives you a much better chance of establishing a transparent, objective compensation structure, for two reasons.

First, job evaluation programs are too “subjective”. Anyone who has worked with a point factor job evaluation system knows that significant judgment is needed in applying “points” to internal job factors. It is very easy for managers to manipulate this process to get the “score” they want.

Secondly, job evaluation programs are sometimes not sensitive enough to marketplace realities. For example, let’s suppose two jobs are placed in the same salary grade because the job evaluation assigned each the same number of points. But what happens if qualified candidates for one of these jobs are in extremely short supply? Difficulty in finding qualified candidates often causes organizations to raise the salary level in order to more effectively recruit. This could result in one of the jobs being in a higher salary grade than the other, even though the jobs are equivalent from a job evaluation standpoint.

My advice is this: if you want an objective, defensible and transparent compensation structure, ensure that a thorough marketplace analysis of your jobs is performed on a regular basis. You can do this yourself through the purchase of compensation surveys for your geographic area (for example, in Washington, DC, the Human Resources Association of the National Capital Area survey is an excellent resource). Or, you can hire an external consultant to perform the analysis. It doesn’t matter which approach you take, as long as the analysis is done.

Then you will be in a position to explain to employees exactly how the compensation structure was created. You can point to an objective, data driven process. Employees may not agree with every single result, but they will understand that the company went through a logical and objective process. This builds morale, productivity and—ultimately—trust.

About John White: John is the principal of JD White & Associates an HR consulting firm that focuses on Compensation and Benefits, HR Effectiveness and Compliance, Professional Development and Communication.

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