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Sep 30, 2016

It’s time to bring compensation into the modern era. Companies are successful when they make their organization a place where the best people want to work. As a result, HR leaders need to develop compensation programs that embrace this idea.

Today, we find ourselves in an incredibly tight talent market. Unemployment is just 2.7% for workers over 25 years of age with a college degree. It’s become acceptable – even expected in some industries – for workers with a job offer to negotiate higher pay at their current company. In tight talent markets with aggressive recruiting goals, we can assume most employees will interview at other companies at one time or another. So, if employers want to accomplish their business goals, they need programs in place to keep their best people working for them.

However, that doesn’t always mean breaking out the checkbook. Companies are getting more and more creative in their approach, providing the right mix of perks for their talent. For some companies it’s Fido Fridays and foosball tables. For others it’s paid time off, flexible work schedules, or unlimited vacation. Companies are getting to know their people better and defining clearer cultures and values for drawing the right people into their organizations.

At PayScale, we understand the pay business is really the people business. Modern compensation practices keep people central in a company’s pay programs when they incorporate three approaches: be fair, be transparent, and be modern.

Be fair: Pay them right

Pay equity laws are becoming more commonplace, with California and New York taking the lead in January 2016, and many states following suit. That said, it’s key to understand that pay equity and pay fairness aren’t the same thing. Pay equity means ensuring an employer is not discriminating in its pay practices, especially on the basis of gender. However, paying fairly is a much broader concept, one that resonates especially well with the millennial generation. Fair pay appropriately differentiates pay based on factors such as performance, skills, education, experience, and contribution to the bottom line.

Paying right means defending pay decisions with data. It’s not enough for an employer to believe it pays fairly, now the company also needs to show employees how their pay was generated to ensure they understand they are being paid fairly. One way for employers to both ensure and demonstrate they are paying fairly is to base their pay on current and accurate market data. If employers aren’t already looking at the value of their jobs in specific talent markets, they should expect that many of their employees are doing this and already know their value.

Be transparent: Tell them the truth

Perception of pay has a huge impact on employee satisfaction and intent to leave. In a PayScale survey of 71,000 people, we found that most people don’t actually know if they’re paid fairly. Of the people surveyed who were actually paid above market, a whopping 80% believed their pay was either below or at market. In another survey of 550,000 respondents, 82% of people were actually okay with lower than average pay if the rationale was explained to them. Talking about compensation matters a lot and it’s up to employers to start communicating with their employees about pay.

However, it doesn’t have to be all or nothing because pay transparency is actually a spectrum. On one end, employees know only details about their own pay; in the middle, companies share details about their comp strategy; and radical transparency is at the far end of the spectrum, where each employee knows the compensation of every employee at the company. Organizations need to identify the level of transparency that works best for them based on their employees, industry, and culture, and then push the envelope a bit. While it can require a new mindset for many employers, the shift in thinking will be worth it when employees feel more satisfied with their deal.

Compensation transparency helps managers, too because most conversations about pay occur between managers and employees (i.e. not between HR and employees). Because compensation discussions are carried out across the organization, HR should support all managers in the transition to a more transparent culture and coach managers about conveying how employees pay was determined.

Be Modern: Comp for today and tomorrow

A lot of employers are doing comp like it’s still 1999 or even 1969. Compared to other functions in most organizations which are based on sophisticated analytics and data, compensation management is far behind. Meanwhile, much of the day-to-day work of compensation management hasn’t evolved much and is still mired in complicated spreadsheets. The main constant in today’s workplace is change — and the pace is only quickening. The economic landscape remains uncertain, technology alters the nature of work and talent, and our workforces are continuing to evolve. Modern compensation management taps the power of data and technology to motivate and engage the workforce we have today and adapts to the workforce we will have tomorrow.

Organizational priorities are constantly being revised, updated, and improved, so real time market data about talent makes it easier to price out a key software engineer job with the hottest skills. At the same time, employers often don’t know when an employee is going to knock on the door for a comp conversation. In these real-time situations, managers and HR need reliable data at their fingertips to ensure they can both attract and retain the right talent.

Gone are the days of compensation plans that are separate or disjointed from the central focus of the organization. Today, modern compensation professionals must be aware of organizational goals and find ways to drive those goals by creating comp plans to promote the right talent initiatives.

How an employer pays, how they communicate about pay, and the sophistication they bring to matching pay to their business goals determines how a company is perceived in the market. Being fair, transparent, and modern will help any organization keep their best people, find new stellar talent, and perpetuate an organizational culture that ensures their company is an employer of choice. And once an organization has created a culture where compensation is key and the best people want to work there, there’s really no stopping them.

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