Bosses, Deciding What To Pay People Shouldn’t Be A Guessing Game. Try This Instead

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When I was a kid, my father owned a coffee shop where I helped out. For his 10 or so employees, Dad had a simple pay philosophy. If he liked someone, he paid them more. If he didn’t, well, too bad.

Of course, that’s not how big companies pay people — in theory, anyway. They have a detailed compensation policy that explains how everyone from employees to contractors should be rewarded.?

But at the individual manager level, it almost inevitably breaks down. Pay remains frustrating, deeply emotional and hard to enforce at scale. That’s led to entrenched inequities, frustrated employees and calls for improved pay transparency .??

And the problem is getting worse. Only a third of US employees now think they’re fairly paid. And when my company surveyed workers, eight out of 10 said they wanted pay transparency from their employer.

The good news? Pay might be broken, but there’s a way to fix it.

As the co-founder of a firm that helps businesses use people data to make better decisions, I’ve watched clients wrestle with the pay conundrum. Here’s why compensation is such a mess — and how companies can make it better.

Why is pay so difficult, and what’s at stake?

The problem is that pay is always personal. No matter how clear a company’s compensation policy is, it’s ultimately left to individual managers to implement. It’s what I call the “last mile” of pay equity.

And that last mile is littered with wreckage. As much as we like to think that pay is a science, compensation decisions at organizations large and small often come down to gut instinct and mental math, leaving some employees overcompensated and others shortchanged. Worse still, bias — whether unconscious or not — is widespread. We’ve all seen how favoritism can count as much as performance and tenure. Meanwhile, factors like gender and race still sway compensation. In 2022, female American workers typically earned 82 cents for every dollar earned by men — a number that’s barely budged in two decades.

When managers do try to make data-driven choices — by drawing on internal and external benchmarks — the information they need is often locked away in spreadsheets. The research and calculations required to systematically calculate individual compensation can slow pay decisions to a crawl, adding an extra burden on already overworked managers.??

This invariably leads to shortcuts: managers might base raises on the last few employee interactions, unduly reward “squeaky wheels” while overlooking quieter workers, or simply give team members a uniform bump across the board in order to save time.??

At an individual employee level, the fallout from poor pay decisions can be dire. Unhappiness with compensation leaves people less engaged and often drives them to quit. During the so-called Great Resignation in the wake of the pandemic, more than 60% of workers left their jobs because of low pay.?

At a company level, the result is systemic inequities around compensation that are hard to root out. That’s why there’s growing momentum around pay transparency throughout the US and the European Union. California and New York both now have laws that require employers to reveal compensation scales and other details. In the EU, a transparency directive aims to ensure that all employees get equal pay for equal work.?

As businesses tackle pay inequity, it puts even more pressure on managers, many of whom lack the experience and skills to navigate the complexities of compensation. In fact, we found that more than a third of managers dealing with compensation change are going through it for the first, second or even third time at their current employer.??

... getting compensation right requires not merely guidelines but a way to implement them, equitably and at scale. Managers need more than rules; they need tools.?

OK, so how can we fix pay?

Fixing the last-mile problem in pay starts with helping managers make simpler and fairer decisions.

Company culture and leadership from the top can make a big difference here. Leaders need to educate their managers about the value of making data-driven pay decisions rather than relying on a hunch. To that end, they must ensure that people understand the company’s pay philosophy, along with the key factors that should determine compensation, from internal guidelines to external benchmarks.

But it’s not enough to have your pay policies in a PowerPoint deck. Whether we’re talking about a few dozen or a few thousand employees, getting compensation right requires not merely guidelines but a way to implement them, equitably and at scale. Managers need more than rules; they need tools.?

Here, a new breed of smart compensation tech is showing promise. These productivity tools for pay crunch the mind-numbing array of variables in play, factoring in the intricacies of company policies and industry benchmarks, to provide compensation suggestions. ?

These tools are multidimensional in ways that spreadsheets can’t match. They account for compensation philosophy. (Are you paying on performance? Rank? Tenure?) They factor in up-to-date information on salary levels and incentives. They adjust for geography and market demand.

But the best of these tools go far beyond that. They also incorporate rich data on individual employee performance and engagement to make pay suggestions. Is a team member exceeding sales targets? Consistently working late? Spearheading new initiatives? New tools can integrate these people data points into the overall pay picture.

AI is taking these smart comp capabilities to the next level. Instead of diving into charts and tables, managers can pose questions in plain language. For example, a boss might ask, “Which people in my department deserve a raise?”?

Salary is then compared with median pay for a similar position inside or outside the company. Pay gaps attributable to race, gender or other factors are flagged. Instantly, employee performance is benchmarked against job standards.

A process that may have taken hours or days is compressed to a few minutes. Armed with that data-driven insight, managers can justify their pay decision to an employee, bringing transparency to what might otherwise be a tough conversation. On top of that, HR has a record of the rationale. Even more important, there’s consistency across departments.?

When it comes to pay transparency, every organization has its own comfort level, but the benefits add up. Transparency boosts retention by 30% or more, one study found. Roughly three-quarters of US workers are more likely to trust organizations that include pay ranges in their job postings. And more than two-thirds would switch to an employer with more pay transparency, even if compensation were the same.

Ultimately, the guidance offered by a smart compensation tool is just that — a suggestion that someone must sign off on. In any pay decision, the human element remains vital. But I’ll bet you a cup of coffee that for manager and employee, removing bias and guesswork will leave both feeling better about the final number.?

Thanks for reading! I'd love to hear what you’re seeing in your own industry, so please share your thoughts into the comments below. For more news and ideas around people data in the workplace, be sure to subscribe .