Explaining Compensation to Employees

Last week, the Ontario Government announced that after a 4-year freeze that they will increase the minimum wage from $10.25 per hour to $11.00 per hour. I never considered this as affecting my clientele until I was at dinner with a small business owner on Thursday evening. While she does not have any employees at minimum wage, the government’s announcement caused her employees to wonder whether their wages would rise a similar amount. She wasn’t prepared to raise their salaries but was struggling to figure out how to address her employees’ expectations. As a result, she was anticipating some disgruntled feelings on her team.

I asked if her employees had been receiving annual increases in the past four years. They have been. Next, I asked if those increases were proportionally less, the same or more than the minimum wage increase. Their increases were more. She now had a rational explanation for her employees regarding why an increase in minimum wage wouldn’t not translate to a raise in their wages.

Explaining compensation to my employees was also one of the most challenging parts of my leadership role and since I had over 1400 employees, I think I got pretty good at it. I strongly believe leaders need to explain how their company makes money. While this statement seems obvious, my experience is that many companies don’t. They assume employees just understand. As a result, in the absence of fact, employees set their own expectations and morale suffers when those expectations are unmet.

A number of years ago, a consultant informed me that he thought he was underpaid and expected a significant raise. He had been with the company for a few years and was an experienced consultant before joining. During his tenure, he had not advanced his skills or taken on more complex or difficult projects. I explained to him the consulting revenue business model, which assumes that billable revenue for each consultant is 2.5 to 3 times their level of compensation. In his case, his total compensation (current salary and incentives) fell within this range but his increased salary expectation did not.

Our discussion now shifted the focus of the conversation from his feeling that he was underpaid to a positive discussion on a plan for him to develop more advanced skills to justify a higher billing rate or for him to improve his billable utilization (which also involved getting different skills so he could be placed on more projects). A situation that could have resulted in a disgruntled employee who quits, actually resulted in a newly motivated employee.

Another area where many companies miss on engaging their employees in a mature grown-up discussions is the area of stock options. One of my clients recently told me that when employees resign, rarely do they exercise their vested options even though these options are worth money. My assumption is that if they didn’t value these options when they left, they probably didn’t value them much when they were there, thus defeating the motivation and retention reasons that company’s awards stock options.

At PeopleSoft in the 1990’s, our compensation model was designed to pay base salaries that were lower than market average but overpay on total compensation when you include incentives and a long term view of stock options. It was common to be recruiting an employee who was being offered 20-50% more base salary by someone else, yet most of the time, I was able to convince them to join PeopleSoft. Often, we were the preferred choice when considering culture and job attributes but still had to get passed the issue of low base salary. Instead of hiding from it, I faced it directly at the first point of contact with the new recruit. I explained our compensation model up front and tied this discussion back to our pay for performance culture. The key was to get the recruit to buy into this culture, which included other values such as “work hard, play hard” and “no bullshit”. The result was great candidates understood the opportunity for them if they performed as well as they thought they could. Weaker players, who were less confident in themselves, took the job with the competitor, which was fine by me.

Explaining to your employees how your business works, how it makes money, and how this ties to your compensation philosophy and model is a key element to your employee engagement strategy. My experience is that it results in better recruiting, better employee retention and better business results.