Mission Impossible: Managing and Mitigating Internal Pay Issues

Compensation Questions and Answers from Our Webinar on Managing Salary Ranges and Internal Pay Equity

The following is a transcript of the question and answer session that followed PayScale’s webinar, Mission Impossible: Managing and Mitigating Internal Pay Issues. The main topic covered in these questions is how to negotiate pay raises and cuts with current employees. Answers are provided by PayScale’s webinar leader and director of customer service and education, Stacey Carroll, M.B.A., SPHR.

Q: How do you compare a job position where only one such employee exists internally?

A: I think there are two things. One is we can compare that person against the market rate pay and compensation data, so external market. The second thing is going back to the earlier point that I made about having employees in similar jobs aligned appropriately. I think it’s a good thing to take a look at how similar jobs at similar levels of responsibility in the organization are aligned with one another.

Q: What would you suggest for a compensation market, such as Alberta, Canada, where Tim Hortons’ employees are paid $17 an hour? How can you develop something that’s realistic but still getting skilled employees?

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A: I think that is a reality that many, many employers are dealing with as compensation markets fluctuate by area. And, I know for a lot of places up in Canada you’re competing against oil and gas, which seems to have unlimited budgets and is kind of sucking up all of your skilled workers. I think it’s really important that you have accurate pay and compensation data because that really is what the compensation market is there – the market for skilled workers. You have to make conscious compensation decisions to come up to those salary levels or to make really tough decisions about how to attract talent and build those employee resources internally with training, knowing that you may risk losing them. And, also, you may have to make even tougher compensation decisions which involve taking a look at where you’re located and ultimately when that becomes cost prohibitive.

Q: What is red circling employees?

A: The policy of red circling employees is simply freezing an employee’s pay at a certain pay level until the market, either your internal salary ranges or the external compensation market or however you’re measuring that, comes up to what they’re being paid. That way, you don’t continue to pay more and more and more as that employee gets farther and farther away from the market salary range for their position.

Q: We’ve never utilized compa ratios to identify pay discrepancies. We have compa ratios in our HRIS but we haven’t analyzed them. How would we utilize these to determine pay discrepancies?

A: Compa ratios is simply taking a look at where the employee sits against the midpoint of a salary range and that salary midpoint is hopefully anchored on market pay and compensation data, as well as some internal decisions that are made about how to group similar job positions. But, ultimately, a salary midpoint should be defined as full proficiency for an employee. So, if an employee is at a .90 compa ratio, then for some reason, they’re below the fully proficient employee. Maybe they’re new to the organization. Maybe they don’t quite have the same education. Maybe there are some skills or certs that their not fully proficient in. Those could be reasons why that’s justifiable. If there’s no reason why that’s justifiable, then we need to take a look at why there is that difference between what the employee’s paid and what we say the salary range for that position is within the organization. So, it’s a really good exercise to just take a look at your employees and their compa ratios and using resumes and other resources you have, or maybe just sitting down with managers to understand, “Does it make sense that this employee is below the market pay? Does it make sense that this employee is over the compensation market rate?” And, then making those kinds of compensation decisions.

Q: How do you have a conversation with an employee about having to take away money due to the market salary range or internal pay equity?

A: That’s a very difficult conversation to have and I have, to date, never worked for an organization that has made a decision to take money away from employees. I can imagine that many of the companies I worked for previously are considering it, especially in these tough economic times. But, it is a difficult conversation to have. And, I think a company should look at it as a last resort. Because, there’s a certain amount of pay that’s based on straight numbers and then there are certain pay issues that come down to this: an employee gets used to their salary range and their standard of living and violating that for any justifiable reason is never going to make the employee feel okay about it. So, if it is an absolute last resort and you must and have to do it, then I think it’s really important that an employee understands how the decision was made – that it was done with care and done with reliable resources. And, I would hope that if you’re doing this with one employee you’re doing it across the board. So, explain to the employee the process you’re going through. And, I think ultimately it doesn’t hurt to explain to the employee why it’s happening. If it’s done in lieu of job loss, I think that it’s really important that the employee understands the larger context.

Q: What would you recommend in terms of lowering the salary range or payscale for an employee whose job evaluation highly suggests that they are overclassed?

A: Yes, this is a really yucky situation and it probably has some history to it in terms of how it happened. But, I believe it’s really important that first and foremost, employees are appropriately classified so if you need to move them down to their appropriate employee classification, I would do it. And, then I would red circle them, if your organization would allow that. Say to the employee, “This job evaluation has happened. This is where you fit. It’s appropriate.” And, if possible, if your organization can do it, say, “We’re going to keep you at your current salary range. You’re going to be red circled. This is what that means. This is how that’s going to work. And that’s where you’ll stay until the market catches up to it.” Making pay changes because employees are classed inappropriately helps keep you from getting down a rat hole that you can never get out of. First and foremost, make sure that employees are classed appropriately. If you have to deal with pay equity issues on top of that then do that with other policies and practices but don’t justify keeping people in an inappropriate pay classification just to justify their salary.

Q: How do I get a business owner to understand that it’s not okay to pay his family members more than others in their position?

A: Family-owned businesses provide a whole host of other issues that I don’t know if we can address here today. I think our best advice as HR professionals is to keep educating and to keep delivering the message. It does not mean, and I learned this the hard way early in my HR career, it does not mean that it will be listened to or that action will happen. But, ultimately, we are responsible for the education and guidance of our organizations. We cannot always be responsible for the compensation decisions that are made. It would be nice if we could but usually most of us are in the positions we’re in because we don’t want to be in those decision-making positions.

Q: Where do you feel the best resources are for communicating compensation policies and pay practices to employees?

A: I believe in a multi-leveled approach. I think it’s something that should be done verbally whenever the chance arises. I think it should be documented in newsletters and other things in a more informal way. And, I think employees should have access to those compensation policies and pay practices on the Web or internal Web or wherever you keep all your pay practices.

Q: I don’t have a lot of compensation planning experience so I don’t know about developing a formal compensation plan. Where do I start?

A: Well, you start with PayScale and, again, not a huge sales pitch but we really do have the right compensation resources to get you on the right path. And, my job in customer service and education is to help you figure out how to use that tool in order to create a formal compensation plan. So, come talk to us. We’ll help you out.

Q: Could you please address this 2009 hot agenda item: The Paycheck Fairness Act? Legislation would require employers to demonstrate pay differences are not based on gender and would remove caps for compensatory and punitive damages.

A: We’ve been watching that, certainly, and I think that it doesn’t change that it’s always been illegal to discriminate. It makes it easier for employees to pursue a corrective method. Yes, so, it’s very, very important and I should have mentioned it because it’s a great reason to be talking about this topic. So, thank you to the person that pointed that out to us.