How-to-Guide to Compensation Conversations With Employees: Build Trust and Motivation

Good compensation conversations lay the groundwork for trust with your people.

They go far beyond merely discussing pay: they allow your managers to explain compensation outcomes so that your people feel they are treated fairly and transparently.

If your people aren't happy with their compensation outcomes, a good conversation will explain the rationale for their outcomes. And more importantly, your people will understand how to work towards better outcomes in the future.

In this article, we guide you through compensation conversations and how to make them more meaningful, effective, and productive for your people.

🧏 What is an employee compensation conversation?

An employee compensation conversation is a discussion between managers and their people about compensation outcomes and how they're determined. It provides an opportunity to understand and clarify compensation decisions while addressing employees' concerns.

😮‍💨 Why is talking about compensation uncomfortable?

"Salary discussions can make both sides of the desk uncomfortable," says Bespoke HR, an HR consultancy.

And this can feel worse for some groups of employees.

Women, for instance, find that asking for more money or benefits is the most common reason for feeling uncomfortable about workplace self-advocacy, according to a recent survey from InHerSight.

So, what is it about compensation discussions that make people uneasy?

Here are some reasons:

• Talking about money can feel "taboo"—many of us have been taught to avoid talking about money in social contexts, which translates to the workplace.
• Sensitivity—salary can sometimes be a personal and sensitive matter and hence tricky to discuss.
• Lack of knowledge—financial matters can be a complex area that many people lack the knowledge or resources to understand properly.
• Lack of psychological safety—employees who do not have a trusting relationship with their managers may be reluctant to discuss their salary expectations with them.
• Mismatched expectations—employees don't always understand how salary increases are allocated and may have unrealistic expectations for pay rises.
• Lack of understanding about performance evaluations—employees may believe, for instance, that hitting all of their targets means that they've performed "exceptionally well." In contrast, managers may evaluate this as merely attaining what is "expected" for their roles.

🕵️‍♂️ 3 Primary principles you need to consider when discussing compensation

The following compensation principles are worth considering when you have compensation discussions.

Attraction

Compensation plays a role in attracting talent—"without a good compensation strategy, effective recruitment cannot exist," says AIHR.

"To attract the talent your organization needs, you need to be able to offer total rewards packages that are both competitive and aligned with your internal policies and budgeting," explains AIHR.

Compensation can also be designed to attract the particular type of talent that your organization wants.

Idorsia, a Swiss biopharmaceutical company, designed its compensation system to attract "performance-oriented individuals with an entrepreneurial mindset and focused on long-term value creation."

Engagement

Employee engagement reflects the extent to which employees are committed to and involved with their roles and the company.

You can think of employees as having three levels of engagement: actively engaged, not engaged, or actively disengaged.

Engaged employees drive productivity and growth in organizations, so it makes sense to design compensation frameworks that promote higher levels of engagement.

But attractive compensation isn't always enough.

TalentMap, an HR consultancy, points out that "it is probably more likely that your compensation policies are acting as a drag on engagement, even if your compensation plan is competitive in the marketplace."

Compensation discussions are multi-faceted, so how they drive engagement depends on what aspect of compensation is under discussion.

To drive engagement through compensation, TalentMap suggests:

• Get the basics right—as a minimum, ensure that compensation is competitive.
• Be transparent—explain your compensation framework and make sure that your performance appraisal process is understood by your people and perceived as being fair.
• Understand your people's differences—different employees, i.e., in different job types and skill sets, perceive compensation differently, so assess their functional, social, and emotional needs to know how to discuss compensation in a way they can relate to.
• Provide value beyond compensation—reward your people in non-monetary ways and motivate them with increased autonomy, leadership, and learning opportunities.

Retention

Employee retention goes hand-in-hand with talent acquisition and engagement. 

"With the right strategy, you will be able to make sure that your employees are satisfied and motivated enough to be more productive and less likely to leave the organization," says AIHR.

Employee retention is generally related to higher pay. 

A recent study by Harvard University found that each extra dollar of pay (per hour) increased worker retention by an average of 2.8%.

The reverse is also true—turnover rates increased by 28% for each dollar of reduced per-hour pay.

But beyond higher pay, compensation boosts retention in other ways, such as a healthy work-life balance, hybrid work arrangements, flexible work schedules, more paid time off, and family leave, according to research by Randstad, a global recruitment agency.

"In short, if your company doesn't invest in developing a competitive compensation package," warns Randstad, "it will likely lose some of its top talents."

➡️ Take your employee retention strategy to the next level with these handy tips and expert advice.

🗣️ 7 General talking points for managers holding compensation conversations

Consider some of the most relevant talking points for a compensation conversation.

Refresher on the compensation philosophy of your company

Your organization's compensation philosophy is a formal statement documenting its position on employee compensation, explains the Society for Human Resource Management (SHRM).

Communicate your organization's compensation philosophy, covering areas like:

• the principles and values underlying the compensation framework;
• its goals, e.g., to attract and motivate top talent;
• how you incorporate market comparisons;
• pay scales for different job types or levels of seniority;
• pay structures, e.g., base pay, benefits, bonuses, additional rewards, and perks.

Discuss market rates

Assess the market rate for the role under discussion to contextualize your compensation conversation.

Salary.com, a compensation research firm, suggests the following approach:

1. Benchmark the job description—look beyond job titles and identify a suitable job type with a sufficient overlap (say, 70% or more) of the responsibilities, required skills, and deliverables with the role.
2. Position your organization in the marketplace—identify your organization's peer group to allow comparisons with companies of a similar size (since larger companies tend to pay more while smaller companies tend to offer other benefits, like better access to senior management).
3. Evaluate performance attributes—assess the employee's skills, experience, and competencies relative to the role's requirements, including personality attributes such as attitude, work ethic, and teamwork.

Discuss non-salary benefits

Non-salary benefits are becoming more critical in compensation packages as employees emphasize lifestyles over monetary rewards, so highlight these.

Non-salary benefits include:

• flexible, remote, or hybrid working arrangements;
• wellbeing and health programs (
• paid parental leave, long service leave, and increased holiday allowances;
• mobile phones (paid for by the company).

💡 Tip: If relevant, briefly go over the main conclusions of the latest performance review cycle.

The most recent performance review may offer insights on how to evaluate compensation for the role based on:

• Job performance—how the employee contributes to goals, if they met deadlines, and deliverables.
• Employee strengths—competencies and areas of excellence.
• Areas for improvement—goals not achieved and future focus areas.
• Career outlook—personal and professional goals and aspirations within the company.

Acknowledge the employee's contribution

When you recognize your people at work, they'll feel more valued, appreciated, and satisfied. 

As part of your compensation conversation, use these recognition guidelines offered by Harvard University's HR department:

• Be genuine—offer your full attention and sincerity.
• Be specific—describe the activities or accomplishments you want to recognize and the value they added.
• Offer recognition that's commensurate with the behavior or activity being recognized.
• Be personal—accommodate the preferences of the employee, e.g., some people prefer rewards (such as movie tickets or a restaurant meal). In contrast, others prefer a public acknowledgment (such as a "call out" during a future work forum).

🙌 Looking for meaningful ways to recognize your people? Here are 42 recognition ideas that boost engagement.

Communicate the compensation decision

Communicating compensation decisions can be challenging—employees may be dissatisfied with their outcomes or have misaligned salary expectations.

Pearl Meyer, a compensation consultant, suggests the following do's and don'ts:

• Do—use language that the employee can understand, keep a neutral stance (i.e., explain rationale rather than opinion), reiterate how compensation decisions are made, and put the compensation decision in the context of the target range for the role.
• Don't—use complicated terminology, express dissatisfaction with the decision, blame HR, or reveal the compensation arrangements of other employees.

Be clear and consistent when communicating the decision, says Meyer, using the right tone and delivering the message with empathy. Also, be prepared for questions that employees are likely to have and allow ample time for discussion.

➡️ Help your managers have effective salary discussions through comprehensive compensation training. More does & don'ts included in our article. 

Discuss future opportunities

Compensation discussions are an opportunity to develop your people alongside your organization's employee development program. 

Use these suggestions from members of the Forbes Business Council:

• Understand your people's aspirations—assess how best to align and develop their skill sets to fit your organization's priorities, says Terence Tan of The Pain Relief Clinic.
• Encourage skills training—allow the opportunity to enhance current skills and train in areas of passion for employees, says Jean Paul Paulynice of Empowering Confident Youth.
• Offer career advancement opportunities—encourage professional growth within the company and beyond, demonstrating your organization's commitment to developing its people, suggests Jill Strickman of Genuine: The Real People Company.
• Help define a development path—track progress towards goals and empower your people with more control over their career destinies, explains Fadi George of Kalungi Inc.
• Help identify strengths and passions—help build personal capabilities and boost self-awareness as a key to growth, suggests Andrew Vanacker of Sparkx5.

➡️ Establish and maintain high-performance management at your organization with these 11 best practices.

Ask for feedback

Employee feedback is an essential part of the compensation discussion.

"The person whose opinion matters the most in the entire review process is the employee because they are often the most affected by the outcome," says Ranee Zhang of Airgram, "so listen to their feedback on the updated compensation and the organization's compensation philosophy."

Zhang suggests asking questions like:

• How do you feel about the outcome?
• Do you think it's fair or sufficient?
• Do you have any thoughts on the organization's compensation philosophy?
• Is there anything you'd like to change?

Find out what your people care about the most other than pay, suggests Zhang.

And remember that managers get the best feedback when they're open and transparent. 

"When you, as a manager, sincerely request feedback on your own actions and decisions, you make it easier for others to share their own aspirations and areas of improvement," explains Pankaj Srivastava, CEO of PracticalSpeak.

➡️ Wondering which type of feedback is most helpful? Discover what works best in different situations.

💪 4 Scenarios each manager should be able to handle (with talking points)

Compensation discussions can be challenging—prepare your managers with talking points for likely scenarios.

Always start by recognizing the employee's contribution and showing appreciation for their efforts, highlighting any noteworthy accomplishments.

1. When an employee's performance isn't up to the standards that justify a raise

• Explain your organization's compensation framework and where the employee fits within it.
• Clearly explain why the employee's performance does not merit a compensation increase.
• Set specific goals for the employee to work towards and establish progress milestones.

2. When an employee's pay is already sufficiently high

• Describe the market value associated with their role, capabilities, and experience.
• Explain that the employee's compensation compares favorably with the market and your organization's compensation framework and why an increase isn't warranted.

3. When an employee is dissatisfied with the compensation outcome

• Describe the market value associated with their role, capabilities, and experience.
• Explain your organization's compensation framework, how it accounts for market pay rates, and where the employee fits.
• If the employee brings up any other colleagues' compensation arrangements, explain that you cannot discuss other pay packages and bring the conversation back to the employee's situation.
• Explain how the employee's accomplishments link directly to their compensation package.
• Seek feedback and discuss their concerns, noting any areas that have value beyond monetary compensation, e.g., increased flexibility or career advancement opportunities.

4. When it's not possible to increase compensation due to economic conditions or budgetary constraints

• Describe the compensation framework at your organization and how it links to the company's overall performance, which in turn depends on economic factors and market conditions.
• Communicate the reasons for being unable to increase bonuses or pay, i.e., the economic conditions or budgetary restrictions placed on your organization.
• Be transparent about the process underlying the compensation decision. 
• Allow ample opportunity for questions and feedback.

❓ Prepare your managers with the top 5 questions employees might have about pay

Help your managers deal with common questions that may arise. Here are the top five.

1. How is my salary calculated?

• If your organization hasn't already got a transparent compensation model, consider making it more transparent—this will become more relevant as workplace transparency requirements increase.
• Explain the factors contributing to employee pay, e.g., responsibilities, market comparisons, experience, and (sometimes) location.
• Emphasize how the employee's salary is based on its fit with the contributing factors.

2. Is my pay fair?

• Don't be tempted to say "yes" without being sure it's true.
• Try to understand the specific areas where the employee feels they may be underpaid.
• Once you've established it, explain why the employee is being paid fairly based on their competencies and experience and how they relate to the market.

3. Why am I paid less than others in the same job?

• Bring the focus back to the employee rather than others.
• If necessary, set up a separate meeting to assess their specific circumstances.
• Point out why employee comparisons may not always be relevant due to differences in background, experience, or competencies.

4. Can I have a pay rise?

• Explain the criteria at your organization for salary increases, e.g., time in the role, performance improvements, and changing responsibilities.
• Consider your organization's financial health and growth prospects and the competition for similar roles in the market—strong performers may warrant a pay rise.
• If the employee's performance doesn't warrant a pay rise, highlight areas of focus they can work on for future pay rises.

5. How do I get a promotion?

• Promotions depend on the available opportunities relative to employee skills and competencies—they aren't always available.
• If the employee isn't performing to a level warranting a promotion, revise their development plan to help boost the areas they need the most.

📝 Sample compensation conversation agenda

Need more help preparing for a compensation discussion? 

Here's a sample agenda to guide you through the whole process.

Introduction and purpose

• Welcome the employee and explain the purpose of the conversation, which is to discuss their compensation and any updates or changes that may be made. 
• Then, provide a brief overview of the agenda.

Conclusions from the latest performance evaluation

• Review the employee's job responsibilities and performance evaluation over the past year. 
• Highlight their achievements, strengths, and areas for improvement. 

💡 Note: We recommend carrying separate pay and performance review conversations. So these points will be a refresher of the more comprehensive performance evaluation discussion that already took place.

Compensation review (Including non-salary benefits)

Discuss any changes or updates to the employee's compensation package and be transparent about the company's budget constraints. 

Tip: Be prepared to negotiate and discuss alternatives.

• Discuss any changes or updates to the employee's compensation package. 
• Clarify when the changes will come into force.
• (Optional) Explain how the employee's current compensation compares to the market rate.
• Discuss non-salary benefits like health insurance, retirement plans, and vacation time.
• Explain how these benefits contribute to the employee's overall compensation package.

Feedback and questions

• Encourage the employee to provide feedback on the conversation and their compensation package. 
• Address any concerns or questions they may have. Be open to their feedback and suggestions.

Future opportunities

Discuss opportunities for the employee to grow and develop within the company. 

💡 Note: We recommend having a separate and more comprehensive development conversation.

• Explain how career growth can impact compensation.
• Encourage the employee to share their career goals and provide guidance on achieving them.

Conclusion and follow-up

• Summarize the discussion and confirm the employee's new compensation package details.
• If applicable, agree on communicating the conversation's outcome to other relevant parties.
• If applicable, agree on when and how to follow up with the employee in the future.

➡️ Drive learning and performance with Zavvy

At Zavvy, we know that compensation conversations are important for your people. 

When done well, we know they help to build trust and motivate your people to bring out their best.

Zavvy helps your people have more effective performance reviews and compensation discussions.

Book a free 30-minute demo to see how you can maximize the potential of your people with Zavvy.