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To be or Not To be Transparent with your Compensation

by Caroline Buhagiar | 03 Mar. 2017

To be or Not To be Transparent with your Compensation: This is the question for 2017!

To be transparent or not to be transparent: that is the question. Here is a thought experiment for you: imagine if your company decided to become completely transparent tomorrow. How would it work out? How would employees react? Would it turn out well? The decision to become transparent is not an easy one. The transition itself can be both distracting and time-consuming; a lot needs to be considered before moving on the pay transparency spectrum. That said, for many, the rewards outweigh the challenges. Here are some things you should ask yourself before deciding to increase transparency in your organization.

1: What is your company culture like?

Transparency may not currently be one of your company values. Employees and managers need to feel comfortable enough to have ongoing discussions about things that may seem difficult to talk about, including pay. Many smaller companies naturally have a more open company culture because it is easier to communicate one-on-one with just a few employees. For larger companies, it may be harder to have transparent communication; Employees may not even be in the same time zone as their managers, let alone on the same page.

2: Who makes up your workforce?

A lot of workforces are now multi-generational. Different generations expect different levels of transparency. The millennial generation has had more access to information and therefore expect greater communication and data-driven decisions. If most of your workforce consists of millennials, then you may want to consider increasing transparency. Generation Z is coming to the workforce next. While we don’t know a ton about them, we can guess from their online presence thus far. They seem to have learned from their millennial predecessors, who are starting to see very public online choices impacting career opportunities, and prefer somewhat more private communication. If you think you can just keep your company plan behind closed doors and wait for Gen Z to take over, remember that millennials will be the majority generation in the workforce for a number of years to come. This is definitely something for local companies to think about, as “pay” in Malta was always discussed with the few behind closed doors. This has to change if we want to retain our future workforce.

3: Is your company ready to expose everything?

We understand that things can sometimes get a little messy. Are your company’s compensation strategy, philosophy, and practices in order? When you become fully transparent, these will become visible to your employees, customers, competitors and maybe even the media, especially if your company is publicly listed. If you don’t think that your company is ready to bare all, it may be a good idea to get your house in order first so that you avoid unnecessary problems in the short run. Going transparent may need to ensure there is a clear structure in place in terms of pay and whether this is linked to performance or not. In many developed countries, especially in Europe, strong unions have been enforcing a system of equality pay that makes it hard to change. With increasing competition for employee talent and high performers, the system of equal pay will ultimately reduce the organization’s overall performance and ability to successfully execute on strategy. Continually over-compensating employees in a system of equal pay will raise an organization’s average compensation above the market average. This will negatively impact the organization’s financial agility and its ability to invest in areas of the business targeted for growth.

Organizations that fail to correct this pattern will continue to retain under-performers and lose high-performing talent. Pay-for-performance is optimally effective when that performance is fairly assessed, and the results are used as a basis for determining employee compensation. Logically, an organization’s most valuable employees must be motivated by incentives that are fair and directly related to their contributions. Although there is no universal pay-for-performance model, there are some common models that have proven to be unsuccessful. Compensating employees with the same salary or pay rate, regardless of individual performance levels and their impact on strategy execution, is increasingly being recognized sub-optimal or ineffective. In this case, employees are being paid for their time, rather than any significant contribution to the organization. Research shows that recognizing individuals for strong performance has a significant effect on increasing employee motivation.

Pay-for-performance requires a strong performance management process in place that is measuring effectively the contributions of individuals who are then compensated accordingly and fairly. This will require organizations to ensure their employees are properly trained to provide performance feedback and then capture that information and link it to their compensation strategy. If the latter is not there, transparency and pay for performance will create havoc.

As mentioned earlier today employees have access to a lot of information. Numerous requests arrive daily at from prospective candidates or employees to understand the job market and the salaries being offered by different sectors and organizations. This will continue to be fueled by an abundant job market where demand is high and talent supply is weak. Thus, making the job market in Malta an employee driven market where key talent has a big say on their compensation and benefits in 2017!

Caroline Buhagiar is an avid and passionate HR professional who has worked in large multinational companies in Europe, US and Asia. She is fluent in manufacturing excellence, business excellence, building HR capability and driving
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