Due to a recent SEO regulation as part of the Dodd-Frank financial reform act, publicly-traded companies in the U.S. have begun to disclose how the pay of their CEOs compares to the compensation of their median employees (the so-called “pay ratio”). This disclosure is required for publicly traded companies.
A 2018 survey of 356 public companies by Equilar, an executive compensation and governance research firm, found that the typical CEO earned 140 times more than their median worker. Companies above $15 billion in annual sales had a ratio of 263 to 1, and those with the greatest number of employees (43,000 or more) also had the largest ratio, at 318 to 1.
So what’s the big deal? You might assume that most employees know that their jobs are vastly different from the CEO’s, and they aren’t going to care too much about their CEO’s pay. In fact, PayScale’s 2016 study on employees feelings about their CEO’s pay (prior to this ruling) found that most employees (79 percent) didn’t see their CEO’s pay as excessive.
But there is something in this disclosure that may bother employees and put morale at risk: Now that all employees know the median pay figure for their organization (without additional context), it may invite unfavorable salary comparisons between employees.
Someone in accounting may start to wonder, “Why am I paid so much less than the company median?” Someone in Marketing might be thinking, “Why am I paid only slightly above the median when I have 15 years of work experience in the field, I’m in a director-level role, and the typical employee at my company only has eight years of work experience?”
As human beings, we’re all concerned about where we fit in relation to our peers. When it comes to our work, this comparison can become particularly problematic; When we feel that our pay is less than what it ought to be, it has an impact on our job satisfaction, engagement and performance.
PayScale’s latest Compensation Best Practices Report (CBPR) found that only one in five employees feel like they’re fairly paid. And even many of the workers who are paid well above the market still think they’re underpaid. These findings suggest that organizations still have a ways to go when it comes to communicating pay decisions to employees.
When all employees know the median pay figure for their organization (without additional context), it may invite unfavorable comparisons between employees.
As an HR leader, it is important that you take the time to develop a communication plan to address your employees’ concerns about their pay. Here are the things you should address in your communication plan.
1. Your Compensation Philosophy
A compensation philosophy is a great tool for organizational alignment; it helps everyone gain clarity on what your company believes, your corporate values, and what you have chosen to reward. Here at PayScale, the executive team has developed their thoughts on pay and then put them into a document which is shared with all employees, typically via their managers in one-on-one meetings.
Here are a few highlights from PayScale’s own comp philosophy statement:
- We believe that it is important to talk about pay. And all employees should feel like they can talk about it with their managers whenever they have a concern.
- We believe in the market in determining what to pay. The market is a combination of things, including where we’re located. It’s our tech industry. It’s the size of our business and our status as a private equity-backed company.
- Results matter and are the most important part of how we allocate future rewards.
- We believe in work/life balance: we think that for employees to drive the best results, employees need to take care of themselves, enjoy life, their families and outside interests
- Pay is a total package. In other words, it’s more than just salary. It also includes bonus compensation, healthcare insurance, flexible spending accounts. We don’t think of employees just as their salary, we think of our employees as people with gifts to offer. We want employees to think that they’re getting a fair deal.
When your employees read your comp philosophy, they should be able to immediately understand your organization’s values and how those values are manifested in your compensation strategy.
One thing to note is that a comp philosophy is a living document. “It’s important that your HR and executive leadership team come together at least once a year to review your compensation philosophy and make sure it’s one you still want to use”, said PayScale’s VP of People, Stacey Klimek.
When you do choose to update your comp philosophy, take the time to make sure it is specific enough where it:
- Recognizes your key organizational goals
- Outlines how your talent strategy is linked to these goals
- Discuss how the compensation program will support these goals
- Demonstrates your commitment to ensuring fair, equitable and competitive pay increases
2. Your Compensation Methodology
When you share your compensation methodology with employees, it reduces their inclination to make apples-to-oranges comparisons.
Here at PayScale, we think it’s important to give employees a sense of how compensation is defined across the company and where they fit. This means that all employees know what is the range for their position, and where they fit in the range, and how that position in the range is determined.
Additionally, we let employees know that we use a consistent methodology to price all jobs, including executive level positions. According to our CEO, Mike Metzger, “’Regarding our exec team, we use the same methodology as we do with all our employees: We evaluate the role, we look to the market to see what people in that role are being paid, and we decide where an individual sits relative to that range.”
If you use multiple talent markets for different jobs (e.g. software engineering jobs versus business analysts), share that with employees too. Otherwise, they may not understand why a software engineer in Denver makes $35,000 more than a business analyst in Seattle.
3. Help Your Employees Understand How They Can Grow
If an employee is low in the range for their position, they may feel like it’s a bad thing even though it may be perfectly okay for where they are in their tenure. But they wouldn’t know that unless you mentioned it.
Here at PayScale, we tell employees that the range midpoint is considered the proficiency point for the job. When a new hire starts, they’re usually placed somewhere between the range minimum and range midpoint. The exact placement depends on the relevant skills and experiences that the individual brings to the role. This is determined after discussions with each hiring manager. As someone gains proficiency, their pay approaches the midpoint; those who go above and beyond their job responsibilities (more tenured employees typically) move towards the upper end of the range.
4. A Total Compensation Report for Each Employee
Here at PayScale, each employee receives a total compensation report/statement at key times in their employee life cycle (upon hire, after an increase in pay or promotion). The total compensation statement (also known as total reward or employee comp report) is a valuable tool companies can use to foster transparency and communication, and to improve the employee’s understanding of their compensation. Most comp statements will at the very least provide information on the employee’s cash compensation and a monetary value for non-cash benefits.
As we mentioned earlier, the version PayScale shares with our own employees comes with information about each position’s salary range and where the employee is in the range (as a percentile). This helps certain employees understand that they’re already well-compensated for their position (e.g. if someone is already above the 90th market percentile for their role).
PayScale’s version of the employee comp report also comes with an FAQ, which tries to put things into context. This FAQ answers the following questions:
- Why am I being paid more or less than other typical employees in the same role?
- How competitive is your pay relative to the market?
- If someone is paid higher than the 50th percentile, tell them that they’re doing better than the typical incumbent in their role
- How much does my pay have to do with the market versus my performance?
- How can I grow more and earn more within the company?
- What is the organization’s strategy and how does it affect me?
Instead of just looking at the CEO pay disclosure requirement as a risk for HR departments to manage, you can see it as an opportunity for your whole organization to embrace increased pay transparency. Employees are increasingly expecting transparency around pay from their companies, and companies who don’t respond accordingly will lose their workers’ trust.
Unfavorable salary comparisons fester in the absence of information. But when you foster an environment where it’s comfortable for employees to talk about pay, and when you give employees the same information your company leaders have, you can strengthen the foundation of a healthy culture.
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Does your organization effectively communicate your CEO/employee pay ratio? We’d love for you to share your thoughts with us below!