4 Essential Strategies for Discussing Pay with Employees

It’s that time of year again! Employees are anxiously awaiting their annual pay and performance discussion, while managers may be dreading it. Unfortunately, even the best managers often don’t look forward to these conversations.

There are built-in challenges in the annual increase and performance management discussions. Limited budgets, forced rankings, or vague approval processes can leave managers feeling less than confident when talking about pay with employees.

However, discussing pay openly and addressing employee questions is essential. Connecting accomplishments and growth opportunities to salary increases is especially important in organizations that emphasize pay-for-performance.

With pay transparency now a legal requirement in some states and an expectation from employees, it’s crucial to prepare managers to have informed and confident discussions about pay. Here are four key tips to help managers navigate these conversations effectively.

1. Prepare in Advance for the Compensation Conversation

Start planning early for the annual increase and performance review process. Use slower periods throughout the year to assess alignment, identify improvements, and adjust the process as needed. Any changes will likely require buy-in from key stakeholders, so factor in approval time.

Key considerations:

• Learn from previous years: Gather feedback from managers and employees on what worked well and what could be improved.
• Review the approval workflow: Ensure managers understand why pay recommendations may change and provide them with the necessary context.

2. Align Pay Decisions with Compensation Drivers

Transparency in pay discussions requires confidence in how compensation is managed and administered. Ensure your pay practices align with your compensation philosophy.

Steps to take:

• Monitor how employees are distributed within pay ranges.
• Assess whether experience and performance are reflected in compensation.
• Use compensation formulas and metrics to identify alignment and correct discrepancies before the annual increase process.

3. Provide Managers with Context

Employees and managers approach pay conversations from different perspectives. Managers often have access to compensation data, company financials, and internal benchmarks, while employees rely on external sources like job postings and peer discussions.

To bridge this gap, managers should have a clear understanding of:

• The company’s compensation philosophy.
• Merit and total increase budgets and how they are determined.
• Salary structures, applicable pay ranges, and how they are maintained.
• The factors that influence pay increases, such as performance ratings and position in range.

Providing this context equips managers to offer accurate, fact-based guidance to employees.

4. Support Managers and Employees

HR plays a vital role in making pay discussions more transparent and less stressful for both managers and employees. Incorporate compensation education into employee communications, onboarding, and training.

Consider including information on:

• How the company determines pay.
• The factors influencing pay increases.
• The difference between cost of living and cost of labor.
• How the company establishes pay increase budgets.

HR should also be available as a resource for managers, helping them prepare for pay discussions and address follow-up questions from employees.

A Final Thought

One of the biggest mistakes managers make is underestimating how personal pay discussions are for employees. While managers focus on budgets and compensation analysis, employees are often thinking about personal financial obligations—rent, childcare, or saving for the future.

Encourage managers to remain professional yet empathetic, ensuring that employees feel heard and valued.

Looking for more guidance on supporting managers with pay discussions? Contact The Comp Consultants at [email protected].