LeaderTips: Have meaningful compensation discussions with your employees

How many of you dread the compensation process at your organization?  I am betting most of you have a bit of anxiety about this process and for good reason. It starts with the hard decision of what to recommend for each employee and goes right through to having the compensation conversation with your employee(s).

The corporate budget for merit increases was probably only 3% again which doesn’t leave a lot to go around.  Your organization, like most other organizations, probably looks to differentiate merit increases between your high performers and lower performers.  You likely already feel that the merit budget is too small.  Your high performers feel like they have worked really hard and are looking to be rewarded.  They could end up disappointed that their compensation isn’t growing more.  Your lower performers who are getting 0% or 1% are definitely not going to be thrilled.  Not to mention, the employees who are meeting expectations probably won’t love their increase either.  So, you anticipate that nobody is going to be happy with the message you are about to deliver!  This probably only adds to your dread and desire to avoid the topic altogether, or possibly to just send them the “letter” and skip talking about it.  But, not talking about compensation in an open, transparent way with your employees ends up breeding distrust.  So, how should you successfully navigate the compensation process?

Here are some key steps for the merit increase process.  Most, if not all of this advice applies when you are deciding on bonus awards as well. Not all of these steps are easy, but they are all important.

  1. Think through your recommendation for each employee. Compensation decisions are important to employees and feel very personal.  So, it is important that you give it attention and really think about what the right merit increase is for each of your employees.  Things to consider include his/her performance during the past year, and how his/her pay compares to what the market will pay for this kind of job.  You may find it appropriate to give larger increases to people who are average performers but below market competitive pay and smaller increases to people who are high performers but above market competitive pay.  You will likely also want to reward your higher performers as much as possible.  These are tricky things to balance, but both components are important to consider.
  2. Prepare for the meeting. Be prepared to defend your recommendations openly.  You may be able to wing it in a lot of your meetings, but this is not one of them.  Once you’ve decided your recommendations, you have to be ready to talk openly with each person about your decision. Prepare for the meeting – know what you want to share, why you want to share it, and anticipate the reaction from your employee. This will help reduce your anxiety about the meeting.  If you feel calm and collected in the meeting it will help your employee trust what you are saying and decrease the likelihood of the meeting getting emotional. If you decided to give a lower performer a 0% merit increase because you think differentiating pay is the right decision, you have to be able to explain that.  The same is true for every single employee and the pay recommendation you make.  You also have to be comfortable sharing your perspective on the merit budget.  This does not mean blaming someone else for not being able to give them more money! It does mean acknowledging that you wish the budget was bigger, but the organization has set the merit budget based on financial considerations as well as competitive market pay.  It also means sharing how you reached your decisions within the compensation framework.
  3. Intentionally have a conversation with each employee. Set aside a specific meeting with each employee and make sure they know the topic is their compensation.  Make this a separate conversation from their performance discussion.  If you discuss performance and compensation in the same meeting, the only thing your employee will remember and focus on is the compensation part.  So, be sure to talk with them about their performance first, and in a separate meeting discuss compensation so they can focus on each topic.
  4. Share all the facts and allow the employee to have a reaction. Share all the information with the employee including: what the budget was; how the budget got set; how compensation decisions are made; where their performance stacks up relative to other employees; what their merit increase is; and ultimately why they received that merit increase.  Once you have shared all the information, ask your employee for their reaction and allow space for them to actually have a reaction, even if it is not positive.
  5. Make sure you represent the decision as yours and stand behind it! You may find out that they are thrilled with their increase, which is great and easy!  But, if they are not, know it can be ok for them to not be happy and you don’t have to immediately try to fix it.  Let them have the reaction and listen empathetically. Let them know you are willing to discuss their compensation and your reasoning at any time in order to answer their questions.  Remember, you had a good reason for each compensation decision, so revisit that information if needed.  Unfortunately, in the world of budgets (which we all live in!) not every compensation discussion will end with happy employees.  This is not the time to blame someone else for the merit increase not being bigger.  It is important for your employee(s) to feel that you were available, honest, and transparent with them about their compensation. They need to know they can trust you and talk with you about their compensation.  They also need to know that you are an important part of the decision-making process.

Talking with your employees about their compensation is a critical part of your job as a manager.  It can feel a bit scary, but being courageous is the right thing to do!  Additionally, employees who feel they cannot talk with their manager about compensation will end up talking with someone else about it if they are unhappy.  If you don’t want that to be a recruiter for another company, it is important to keep open lines of communication with your employee(s) about this important topic!


Jennifer is a seasoned leader and executive coach with over 20 years experience including as a Chief Human Resources Officer overseeing the HR and Communications functions. She is an Associate Certified Coach through ICF.

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