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Written by: Regina Brodersen

Many organizations are gearing up for performance review time and many (supervisors, employees and HR practitioners alike) are dreading the process, each for their own reasons. Supervisors are trying to catch up on what happened during the first nine months of the year, employees are getting ready to defend the fact that they didn’t reach all of their goals and HR is trying to add a level of objectivity to the ratings which then will determine the merit increase.

So how do organizations determine fair pay and how do employees know they are paid fairly and equitably? And if employees don’t think they are paid fairly, how does that affect their engagement and performance?

« The importance of pay fairness to employees can also be observed by its relationship to a number of important work and life outcomes, including employee engagement, turnover intentions, work stress, psychological and physical health, and life satisfaction »[1]

Claudine Kapel, in her article on pay fairness[2], mentions a Kenexa global survey where only 40% of respondents felt they were fairly paid. This would indicate that more than half of a company’s workforce feels they are not paid fairly which will directly impact engagement and performance, two factors which can severely impact a company’s profitability. This all makes perfect sense to me. If I feel that my company is looking out for me and I don’t have to fight for fair pay I can concentrate on my work. If I feel that I am not compensated fairly, either internally within the organization, or externally by having used an online salary calculator, my motivation and engagement will suffer. Why is it so hard for companies to be transparent when it comes to compensation? Wouldn’t this take away the guesswork on the part of the employees? How hard can it be to tell an employee where they sit in the pay range, what pay they can expect if they reach the next level or get promoted and what performance parameters are used to determine their pay. If perception is reality, maybe we have to look at the perception an individual has of their performance, but how can we do that without comparing them to higher performers within the organization and therefore fostering competition rather than teamwork. Using the job descriptions for a certain role and communicating the pay band for a certain role could be a start. If they are performing at a satisfactory level they should be in the mid-range but should also receive feedback on what they can do to be paid at the higher end of the pay range.

How do companies address inequalities in pay when comparing a long tenured employee with one who has recently joined the company. Maybe the tenured employee has maxed out and may even be outside of the pay scale. How does the newer employee get compensated compared with the tenured employee. Companies conducting a compensation analysis might be in for a surprise when comparing their salary data with market analysis. Strategies addressing inequities might range from red-circling for employees paid at the high end of the pay scale to a larger percentage increase above the annual merit. Managers will have some explaining to do but explain they should. Red-circled employees won’t be happy if they do not get their expected increase and their engagement and performance might suffer. Employees who will get a larger increase because they were underpaid might initially be upset because they were not paid fairly but since the gap has been addressed should recover fairly quickly. Fair pay is potentially the most difficult aspect of managing employees because too many subjective factors are at play : properly grading roles within an organization, rewarding tenure rather than performance, rewarding employees who please their bosses rather than the hard-working anti-social team member, determining the correct performance measures which positively impact a company’s profitability, paying new employees what they are asking rather than how they fit into the company’s compensation banding.

A couple of years ago with a tight labour market companies paid higher compensation to attract talent, in recent months the same individual’s salary might be a lot lower. Companies can adjust an individual’s salary up to 10% without the risk of facing constructive dismissal charges. But that could be short-sighted if the oil price and subsequently the economy recover.

Human Resource Professionals have the complex challenge of trying to achieve pay equity within the organization and the geographic and industry-specific parameters. They have to start by suggesting strategies to senior management, addressing pay disparities and finding a solution for each scenario. Solutions should then be communicated to supervisors who should then be coached by the HR team on how to address the individuals whose salaries are impacted. These will either be good or bad news and the key to keeping employees engaged will be honest feedback and proper communication concerning the path forward.  

[1] Perception is Reality: The Importance of Pay Fairness to Employees and Organizations, World at Work Journal 3rd Quarter 2013

[2][2] Claudine Kapel: Do your employees feel they’re paid fairly?, October 8, 2013