Employers rethinking compensation strategies to recruit, retain workers

Highly skilled talent is scarce—and getting scarcer. The quest for talent is leading many employers to step up their "pay brand" by being more transparent around compensation and benefits, according to PayScale's 2020 Compensation Best Practices Report.

"Workers today expect transparency because we are living in a digital, interconnected world where information about workplace cultures and practices are easily accessible," PayScale writes. "In a candidate's market, the best people are going to look for positions with employers who are open and fair, reward performance, and offer opportunities for learning and developing and career growth."

PayScale surveyed more than 4,900 employers and found that currently, only 38 percent of the respondents share pay ranges with employees on their job position, 2 percent higher than last year. Most, however, want to increase their transparency about their pay practices, with the majority targeting Level 3 or 4 on PayScale's so-called "Pay Transparency Spectrum" which defines the degree to which an organization shares its compensation strategy with employees.

Level 3 is when an organization has a compensation plan and shares pay ranges with individual employees, and Level 4 is when an organization's compensation plan reflects organization's culture, drives talent strategy and is open to employees (Level 5 is when ranges and employee pay information is available to all employees).

"Increased pay transparency also increases employee engagement and retention when compensation strategy is tied to salary market data and decisions about pay are well communicated," PayScale writes. "In addition, PayScale research has also shown that pay transparency closes the gender wage gap."

The road to greater transparency entails developing a compensation plan, and this year 70 percent of employers say that they either have a compensation philosophy/strategy or are working on one. Thirty percent of organizations use pay ranges for each job position and 24 percent still use pay grades. Seventeen percent use a mix.

"Greater pay transparency requires a more mature compensation strategy," PayScale writes. "It's difficult to communicate transparently when you don't have clear methodologies to answer questions about how you determine pay and it's dangerous to be transparent if you have internal pay equity problems."

In 2019, 16 percent of surveyed employers switched from using pay grades to setting ranges for each position. Of those that made the switch, 20 percent say the main reason was increased precision or to gain a better understanding of the true market value of each position, 14 percent say it was for greater flexibility to accommodate more rapid pay changes, 7 percent to improve culture and ensure employees aren't so focused on pay grades, 9 percent to improve pay transparency, and 49 percent for a mix of the above reasons.

"Another best practice is to share pay ranges for individual positions with employees as well as where the employee falls within their range and why," PayScale writes. "The reasons why include things like years of experience, education, specific skills, location, past performance and other compensable factors. When you are forthcoming about pay, you communicate to employees that you care about getting their pay right and are interested in their career growth and future within the organization."

"Forward-thinking" employers provide employees with total compensation statements or total reward statements that outline all of the employee's rewards, according to the report. These include base pay, variable pay, and benefits, sometimes with a monetary value assigned so that the employee can understand the total value of their position within the organization. In 2019, only 38 percent of employers provided a total compensation or total rewards statement to employees.

"Although giving employees so much information about their compensation can feel scary, it's important to remember that employees are an investment," PayScale writes. "Very likely, the organization has made very conscious decisions about what to offer employees in terms of base pay, variable pay, and benefits. Not explaining this information to employees only leaves the door open for employees to misunderstand or undervalue their compensation and benefits."

Other key survey findings include:

In 2019, 66 percent of organizations agree or strongly agree that retention is a top concern, which is similar to last year. In 2019, 82 percent of organizations gave base pay increases, with 3 percent being the most prominent increase given, which is also similar to last year. Eighty-five percent of organizations plan to give base increases in 2020.
Employers are continuing to employ a variety of tactics to attract and retain top talent. These include merit-based pay (60 percent), learning and development (57 percent), discretionary bonuses (34 percent), and more perks (26 percent).
The majority of employers (57 percent) have completed a salary market data study at least once in the last 12 months. The majority (52 percent) also reference market data for individual job titles at least twice to year; 17 percent did so monthly, 14 percent did so weekly, and 6 percent do so daily. Eighty-four percent of organizations use more than two data sources and 4 percent used more than five data sources.
Employers are continuing to offer standard benefits in high percentages, such as medical, dental and vision insurance (78 percent), retirement contributions via a 401K or 403B (73 percent) and accrued or granted PTO (60 percent). However, more atypical benefits are also being offered and have grown in popularity. For example, remote work is now offered by 48 percent. Education or tuition reimbursement is offered by 45 percent of employers and flex-time is offered by 39 percent. Paid parental leave is also growing in popularity at 38 percent. Unlimited PTO, which is still unusual, has grown to 11 percent.
Top-performing employers, defined as those who exceeded their revenue goals in 2019, offer higher base pay increases as well as more varied incentive pay, such as company-wide bonuses, profit sharing, and employee referral bonuses in addition to individual incentive bonuses. Top performers are more likely to have a dedicated compensation team, conduct a full market study on compensation and use both third-party survey data as well as paid subscription data.
Top-performing employers are also better communicators about pay decisions and offer manager training on compensation basics in higher percentages than non-top performing organizations.

"Top performers are also more likely to provide more benefits, especially tangible benefits, and agree that employees know how to get to the next level of their career within their organization," PayScale writes. "Finally, top performers were more likely to ensure they are part of their organization's strategic decision-making processes."

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Katie Kuehner-Hebert is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience, with particular expertise in employee benefits and other human resource topics.