How to talk about your company's compensation strategy with employees
There’s a growing need for companies to define their compensation strategy. From 2021 to 2022, the percentage of organizations who say they already have a compensation strategy or are working on one jumped from 76% to 86%.
What exactly does a compensation strategy involve? To put it simply, your compensation strategy outlines what you pay, how you pay, and your reasons for making these decisions.
Your compensation strategy is closely connected to your company values and culture—you reward the behavior and results you want to see more of. And communicating this information to employees is an opportunity to reinforce those values. That’s why it’s critical to take a thoughtful and intentional approach to how you talk about your company’s compensation strategy with employees.
Basic considerations for startup compensation
When we hear the term “compensation,” we might tend to think of salary, but in addition to an employee’s base pay, there are many other elements that can be considered compensation. These include things like:
- Other monetary compensation
undefinedundefinedundefinedundefinedundefined - Non-monetary compensation
undefinedundefinedundefinedundefinedundefined - Equity
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This list provides some of the general categories and types of compensation, but keep in mind that these are always evolving to adapt to workers’ current priorities. For example, between 2021 and 2022, PayScale found that the benefits that increased the most include remote work, a work-from-home stipend, flextime, mental health or wellness programs, and switching to a four-day work week.
With the rise of working from home and distributed teams, it’s also important to consider how this may impact your compensation. Some companies create different bands based on the cost of living in certain areas. In these cases, employees that do the same job but live in more expensive places earn higher salaries. Other companies opt to pay all employees who perform the same role the same salary regardless of where they live. According to benchmarking data from Pave, presented at the 2021 HR Transform conference, the cost of labor geography gap shrunk during the pandemic, meaning pay became more equal across geographies.
Keep in mind that even when you share your compensation strategy openly, you will still need to have conversations with candidates and employees about their compensation. You may find that these conversations occur less frequently, but it’s still important to be prepared for them when they occur. For more guidance on how to calculate compensation and salary, check out our Pyn on how to review someone’s salary.
The pros and cons of communicating your compensation strategy
How open should you be about your compensation strategy? This is a question many companies struggle with—and for good reason. According to PayScale’s 2022 Compensation Best Practices Report, “Done correctly, pay communications can foster trust and engagement within a company. If done poorly, retention and company culture may suffer.”
It’s also worth noting that there are many ways to go about sharing your compensation strategy. Typically, many companies opt to be transparent about how compensation is calculated and arrived at, when it’s reviewed, when compensation increases happen, and how compensation is related to performance. In the name of total transparency, though, some companies share their entire compensation structure and what people get paid. As you define your own compensation strategy, it’s worth spending some time deciding where your company falls on this spectrum.
Here are a few of the pros and cons to consider about openly sharing your compensation strategy.
Pros
It has the potential to improve employee perception of your company.
The effects of choosing not to share your compensation strategy might be motivation enough to prompt you to consider being more open. Garry Straker, Senior Compensation Consultant at Salary.com writes in HR Dive, “When pay practices are not clear, it’s common for internal class systems to form, resulting in employee resentment and tarnished employee branding.” On the flipside, transparency sends the message that you have nothing to hide and builds trust among employees.
It lays the groundwork for equitable pay practices.
The pay gap is a very real issue that disproportionately affects women and people of color. And one of the reasons that it can persist is that companies don’t openly share their compensation strategy with employees. Colleen McCreary, Chief People, Places, and Publicity Officer at Credit Karma puts it this way: “I believe there are steps companies can take to improve pay equity within their company and show their dedication to closing the gap. This starts with explaining to employees how they’re paid, how those decisions are made, and how often they’re reviewed.”
You get to shape the narrative.
Let’s be honest—there’s a good chance employees are already talking about compensation amongst themselves. Molly Graham, Head of Business Operations at Quip, told First Round Review, “Never build a compensation system that assumes people won’t know what their peers and teammates are making. They always find out.” And when these conversations happen behind closed doors, they can create bad feelings and trigger employee departures. Credit Karma’s research shows that 49% of American workers have found out that a colleague in a similar role made more money than them and 35% said that they would leave their job if they were paid less than someone in a similar position at the same company. When you’re transparent about how employees are paid, you can shape the narrative and bring these conversations into the light.
Cons
You might need to change your compensation in the future.
It’s important to acknowledge that change is a real possibility, especially in the startup world. When designing your compensation strategy, you’ll likely allow for some flexibility, but there’s still a chance that you may need to make major changes. If you’ve made a commitment to transparency, you will need to let everyone know what is changing about your approach to compensation and why. These conversations have the potential to be harmful to employee morale. “One of the worst things you can do with compensation is change your message,” Molly Graham told First Round Review.
It could have a major impact on your operating costs.
Buffer, a social media scheduling tool, has opted for transparency on employee compensation and openly shares their salary calculation formula. Buffer’s VP of Finance Caryn Hubbard explains that an attempt to simplify their salary calculation by paying everyone the same cost of living would lead to a $1.2 million increase in operating expenses (they ultimately decided to introduce this change gradually rather than all at once). You may make similar discoveries if you’re attempting to simplify or streamline your compensation.
Example communications to announce your compensation strategy
When communicating your compensation strategy to your team, you can use the following structure:
- Start by describing your compensation philosophy. What are the components of compensation? How is it derived? How do things like benchmarking data, levels, competitiveness, location, and timeliness factor in?
- Describe the practicalities. When and how is compensation calculated or recalibrated? When do employees become eligible for compensation review?
- Provide examples. Show some specific examples of both timing and compensation calculations.
- Allow time and space for questions. Make it easy for people to ask questions or request additional information.
- Recirculate and reinforce whenever it’s appropriate. You won’t just send out a single email and be done communicating your compensation strategy. Make a plan for all the times when you’ll want to share information about compensation such as anytime a new hire starts, every quarter or year when performance review season is kicking off, and whenever you make changes to your existing strategy.
Sample compensation communication template
Here’s a template you can adapt for your company. You might use this as the first in your series of communications about your compensation strategy.
We know that transparency is important at [COMPANY NAME], so we’re excited to kick off a series of conversations about our approach to compensation. This will be the first email in this series, and you can expect to receive another when we kick off our next performance review cycle in [MONTH]. Here’s what you need to know at the moment:
Our compensation philosophy
Once a year we review every employee's total compensation package. We do this because we believe no one should feel compelled to move along an organizational chart in order to receive a salary increase. We will always strive to proactively move you to a fair and appropriate market rate for your skillset ahead of you needing to ask for it. We believe doing this will help you do your best work!
In reviewing your salary, we look at:
- The market-rate for your role
- Where you sit in your role’s salary band
- When you are up for a salary review
Timing
Everyone is reviewed on an annual basis. Depending on your start date, your compensation will be reviewed in either January (effective January 1) or July (effective July 1). If you are a new hire, you are eligible for a comp review after you complete at least nine (9) months of employment. After your first review, all future reviews will take place in the same annual cycle.
While your compensation is evaluated once per year, off-cycle compensation adjustments may occur throughout the year. These may occur for a number of reasons, including promotion or a significant change in responsibilities. If you receive a promotion or off-cycle compensation adjustment within nine (9) months of your regularly scheduled review, your compensation cycle may be adjusted accordingly.
Examples or additional details
[You can use this space to provide more detailed examples of timing, compensation calculations, or any other relevant details you’d like to communicate to your employees.]
Compensation questions
If you have any questions about salary and compensation reviews, please contact your manager or a member of the People Operations team at {ADD EMAIL ADDRESS}.